Q3 2021 Genworth Financial Inc Earnings Call
As a reminder, the conference is being recorded for replay purposes.
So we ask you refrain from using cell phones speaker foods or headsets during the Q&A portion of today's call I would now like to turn the presentation over to Tim Owens, Vice President of Investor Relations. Mr. Owens You May proceed.
Thank you operator.
Thank you for joining Genworth third quarter 2021 earnings call.
All of our speakers are remote this morning, so please excuse any sound quality or technical issues that may arise.
In our financial supplement earnings release, and Investor materials, non-GAAP measures have been reconciled to GAAP where required.
Evidence with SEC rule.
Also references to statutory results are estimates due to the timing of the filing of the statutory statements.
And now I'll turn the call over to our President and CEO Tom Mcinerney.
Thank you Tim Good morning, everyone and thank you for joining Genworth third quarter earnings call.
Pleased to report another very strong quarter of operating performance.
Continuing the reasonable minimum and our businesses.
Net income in the third quarter was $314 million adjust.
Adjusted operating income totaled $239 million up from $125 million in the year ago period, driven primarily by the U S life insurance business.
U S life reported adjusted operating income of $93 million for the quarter.
Up from 71 million in the prior quarter and $14 million in the prior year period.
Results were primarily driven by LTC insurance, which reported adjusted operating income was $133 million, reflecting strong earnings from in force rate actions, including higher benefit reductions as well as higher net investment income.
Our U S mortgage insurance subsidiary enact.
Its first quarterly earnings call as a publicly traded company. This morning, following our successful IPO in September.
Its results included very strong adjusted operating income.
Stansell growth in primary insurance in force and robust capital sufficiency.
Dan will provide more details are on an ex performance and its impact on <unk> consolidated results.
We also encourage shareholders to refer to our next earnings release and slides posted on its Investor relations website for more details.
We once again ended the quarter with improved capital sufficiency in both <unk> and our principal life insurance company Genworth life insurance company or click we entered the fourth quarter with a strong cash position of approximately $638 million and exciting plans to further strengthen genworth balance sheet and advance our long term growth.
Yeah.
Looking forward, we remain focused on five strategic priorities, which were working on in parallel as a reminder, our priorities are to maximize the value of enact.
So a holding company debt.
Let's see the economic breakeven and stabilize the legacy LTC portfolio advance, our LTC growth initiatives and return capital to shareholders.
Enact is a valuable business with a leading market position and attractive growth opportunities.
We monetize part of our ownership stake during the third quarter to the successful minority IPO, which created significant value for both companies.
Genworth received aggregate net proceeds of approximately $529 million from the IPO we.
We use those proceeds to retire in full our outstanding promissory note to Axa of approximately 296 million nearly a year ahead of schedule.
After the IPO, both Moody's and S&P issued upgrades to some of our ratings and outlooks as well as those of enact.
Looking further improvement in our financial flexibility and credit risk profile. We are proud of this outcome and the work we've done to date to support these upgrades.
After the IPO, our ownership of enact decrease from 100% to 81, 6%.
We intend to maintain our position for the foreseeable future.
We expect our majority ownership and enact to generate a significant dividend stream and to be an important source of cash flow going forward.
Next I'd like to highlight the significant reduction in debt that we have achieved inclusive inclusive of the $296 million Axa note repayment, we have reduce holding company debt by $1 5 billion year to date. We are proud of this progress which brings us closer to our target debt of approximately one <unk>.
Yeah.
Yes.
We also made progress towards stabilizing our legacy LTC portfolio this quarter, primarily through our multiyear rate action plan or my wrap.
We have achieved approximately $323 million and rate action approvals year to date, including $117 million in the third quarter, which brings our cumulative total to over $16 3 billion on a net present value basis since 2012.
Pursuing these actuarially justified rate actions is critical to achieving breakeven on an economic basis for the legacy LTC business over time.
You can see the success of this initiative illustrated on slide 11 of our Investor presentation, which shows the impact of LTC in force rate actions or I phase on our statutory pretax earnings since 2017.
Since 2019, the annual benefit from Io phase is more than offset our statutory losses from our legacy LTC products in.
In 2021. This included the impact of the legal settlement.
As you can see on slide 11, <unk> are critical to ensuring that premiums exceed payouts, helping to mitigate the risk of large losses in our legacy LTC business in the near term.
Over the longer term.
We will reach a point when premiums will no longer accept payouts and the losses that give rise to our assumption for the shortfall will emerge.
That's why we're continuing to pursue a phase while also addressing high risk LTC categories like policies with compounding benefit increases.
We're doing this by offering reduced benefit packages, which provide flexibility to policyholders facing a premium rate increases and which also limit tail risk to genworth.
We're also developing care management initiatives.
To reduce both the likelihood of people needing care and the level of care they require.
Elias as benefit reductions in care management, we are effectively working to mitigate both near term and long term risks associated with our legacy books.
And as you can see on slide 10, we've made excellent progress on our long term challenge as benefit reduction options continued to be selected at a higher frequency by our policyholders.
As of September 32021, approximately 43% of Genworth LTC policyholders have opted some form of reduced benefit options.
Taking a step back the cumulative effect of rate increases are I phase achieved since 2013 has positioned us well to meet obligations over the intermediate term we've.
We've achieved over $16 3 billion in rate increases on a net present value basis against the current estimated $22 5 billion shortfall and our legacy LTC business.
With continued focus on benefit reductions that care management will help to reduce risk over the long term.
We are currently conducting our annual assumption review and expect to strengthen one of our assumptions our balance sheet utilization rate at the end of the year. Just says that we have strength in other assumptions bring them in line with long term expectations. This.
This assumption is a key driver of results and is expected to significantly increase our estimated shortfall, reflecting how our experience has evolved.
But our best estimates changed and required the strengthening of assumptions policyholders benefit from strong reserves backing our liabilities.
And as with prior assumption strengthening we continue to see broad based support from regulators for Actuarially justified rate increases and fully expect the assumption strengthening to be offset by allowed expansion of our multi year rate action plan.
With a combined effect of prior year I phase.
Assumption strengthening coupled with new assays benefit reductions in care management, we remain confident in our ability to achieve economic breakeven.
We will share more details from our assumptions review on our fourth quarter call.
I want to thank the regulators who are on this journey with us as we work diligently to serve all of our policyholders find solutions to the issues created by products sold in the past and forged a new path forward for the <unk>.
The LTC industry.
I also wanted to highlight the excellent work being done by our U S life colleagues led by President and CEO, Brian <unk>.
Ian joined Genworth as Chief Risk Officer in 2020 and took on his current role in February of this year.
He's been instrumental in further accelerating risk reduction in our legacy LTC blocks. So that we are better positioned to pay benefits over the long term he.
He will continue to play a key leadership role in this effort moving forward as well as helping us advance our strategic growth agenda and long term care.
Before I move onto our LTC growth initiatives I want to briefly touch on the upcoming changes to U S. GAAP accounting under the new long duration targeted improvement or L. DTI standards that were issued by the financial accounting standards Board. We are preparing for the implementation of these new rules and.
Back to provide shareholders with a view on the expected impacts sometime next year I have the effective date in January of 2023.
I want to note that the relative impact of these new accounting rules may be greater for Genworth life insurance company compared to other life insurers given there are U S life portfolio is weighted towards traditional long duration insurance liabilities, including long term care insurance Accordingly, we expect a material impact on our U S. GAAP.
Balance sheet and income statements upon adoption in 2023 and going forward, including a significant reduction of our U S GAAP book value or equity.
The U S GAAP book value for the legacy life companies.
As expected to be significantly lower going forward under the new accounting.
The old U S. GAAP long duration accounting was based on our original pricing assumptions, the new <unk> accounting will change from an original pricing regime to a best estimate more market oriented accounting model.
The anticipated reduction in U S life book value as a U S. GAAP accounting change only it will not impact economic cash flows the best indicator of current and future economic cash flows where U S life in the legacy business.
LTC business remains the statutory cash flow testing regime under statutory accounting.
As a reminder, U S insurance regulators, primarily focused on statutory accounting results in a regulated U S insurance companies and improving dividends from operating insurance companies to the holding companies.
Bachelor accounting for U S lives will not be impacted by the L. D. T. A U S. GAAP accounting changes the new rules will have no impact on cash or cash flow and they do not change U S. GAAP accounting for now.
Also as a reminder, we view the value of our U S life insurance legacy business at zero.
Given that we do not expect insurance regulators to approve future dividends from our legacy life companies for the foreseeable future at.
At the same time, we have no plans to contribute holding company capital into the legacy life insurance businesses. The legacy U S life insurance legal entities will continue to find claims using their existing reserves statutory capital of $2 5 billion as of the end of June and the Actuarially justified multi year rate action.
Plan.
Given the importance of our statutory results and statutory cash flow and statutory capital levels to our regulators and our reliance upon these results to track the progress and impact of our LTC multiyear rate action plan, we are including new supplemental statutory earnings and capital information in our slides today and plan.
To do so moving forward.
Now turning to our next priority advancing LTC growth initiatives, we continue to work towards launching a new and innovative platform that will help address the societal need for long term care in the U S.
The need for senior care is large and growing.
Living by an aging population longer life expectancy, increasing need for care and rising care cost as reported in our beyond dollar study published earlier. This week long term care needs continue to have significant impacts on the aging Americans and their families.
The majority of Americans are unprepared financially.
And unsupported and navigating care and health needs in their daily lives.
While we will need a substantial fast encourage standalone LTC insurance offerings have been largely unsuccessful in addressing the needs of customers who face these challenges, resulting in historically low LTC product penetration.
Meanwhile, insurers have struggled with an ineffective distribution model and unprofitable economics.
We have attempted to innovate only on the edges to increase lives insured with hybrid offerings.
We believe the market is ripe for innovation and that Genworth or with our 40 plus years of LTC experience and expertise is uniquely prepared to capitalize on this opportunity.
As we've said before we believe a successful reinvigoration of the U S. LTC market will address both financing and services and ultimately will help to reduce the likelihood of people needing care <unk> less than the cost of care that they need.
Our long term LTC growth strategy.
Or is that future revenues will be weighted more towards capital light service and advice offerings versus risk bearing highly regulated and capital intensive LTC insurance products, we believe future LTC products and services will require significantly less capital have less risk and produce higher returns for shareholders. We believe.
The capital requirements will be moderate given the anticipated lower level of risk.
As an initial step we're working on expanding our services offering through our existing subsidiary Carescout, which is a leading provider of clinical assessments and care support solutions, where insurers health care organizations and consumers we.
We plan to invest a modest initial amount approximately $5 million to $10 million to recapitalize and scale. This carescout business. So that we can offer more fee based services going forward.
But at the same time, we're also working with a highly rated reinsurance partner on launching LTC insurance products with lower and more predictable risk than in the past. The first product will be a low risk individual LTC insurance product with a significant amount of the risk reinsured by our partner.
However, we firmly believe that the ability to re rate LTC policies annually is absolutely critical success of future LTC insurance products. Accordingly, we don't intend to start writing new business until enough states support the need for annual Rerating, enabling us to launch a business that a sustainable scalable and.
Profitable.
We're engaging with our state insurance regulators on this topic.
We are working towards launching our first new LTC insurance product with our reinsurance partner and the first half of next year.
We are still in early stages of engaging with rating agencies and other stakeholders and look forward to sharing our progress towards launching this new business on future calls.
As we chart a course for future growth returning to capital returning capital to shareholders remains a top priority.
After we receive our debt after we achieve our debt target of approximately $1 billion, we plan to return capital to shareholders via a regular dividend and share buybacks, while also making prudent investments in our LTC growth initiatives.
His commitment to shareholders an important part of our story in the near to medium term.
And over the longer term, we believe there is a significant opportunity to transform the LTC industry through the successful execution of our growth strategy.
Our vision to build a leading profitable platform that offers holistic solutions to the challenges and the aging is a unique value proposition in the marketplace and we will put genworth in a category of one.
We know that realizing this vision will take time and we can't do it alone it will take partnerships with other companies and continued collaboration with our regulators and other stakeholders to bring these new solutions to market and create value over time.
We look forward to sharing updates in due course.
Before I turn the call over to Dan I would like to acknowledge the significant contributions from both our general Counsel Ward Bobbitt's, Chief Human Resources Officer, Pam Harrison.
Both of whom we recently announced our departing the company effective at the end of the year.
They are both served as important council and partners and guiding Genworth progress as.
As we move into the next phase of Genworth journey, a more stable footing. They each have decided that now is the right time to move on to their own next phases.
What was the decision to retire at times, though comes after 24 years with Genworth.
The company through its recovery from the financial crisis and at several strategic review processes throughout which he has built strong relationships within genworth and the regulatory community.
This is a well deserved retirement and I'm thankful for Ward's leadership of the legal team and wars. Many contributions over his tenure.
Tim has been a fantastic HR adviser and partner to me and I. Appreciate all she did for Genworth and me as we worked through several very complicated strategic transactions.
Backed IPO.
Significant disruptions and remote work challenges as a result of COVID-19, and the right sizing of our corporate staff functions given that Genworth has two remaining businesses and after 10 U S life.
I respect her decision to part of Genworth to be closer to her family in New Jersey, and I wish her and her family well.
Both positions will be filled by long serving genworth leaders I have every confidence in their ability to help lead genworth through its next chapter with that I'll now turn the call over to Dan to discuss our third quarter results and financial position in more detail.
Yeah.
Thanks, Tom and good morning, everyone. This was another excellent quarter for Genworth strong financial performance and continued advancement toward our strategic priorities.
Income this quarter was $314 million.
With this quarter's $239 million adjusted operating income of 46 cents a share we've reported more than $600 million and adjusted operating income so far this year.
During the quarter, we fully retired the remaining principal amount of the September 2021 debt maturity of $513 million.
We also successfully executed enact IPO.
<unk> $529 million in net proceeds were used to pay off the remainder of our Axa promissory note of $296 million.
And further enhance our liquidity position.
Moving forward with a strong cash position and a clear path for continued execution of Genworth strategy.
Our enact subsidiary hosted their earnings call. This morning, So I'll focus on the key highlights.
<unk> for the quarter was 24 billion and contributed its overall, 10% year over year increase in insurance in force.
For the third quarter enact reported adjusted operating income of $134 million to Genworth and a strong loss ratio of 14%.
I'd note that Genworth third quarter adjusted operating income excludes an 18, 4% minority interest since the enact IPO date of September 16th of $4 million and adjusted operating income for the third quarter.
Enact finished the quarter with an estimated pmiers sufficiency ratio of 181%.
Approximately $2 3 billion above published requirements.
The improvement in the Pmiers sufficiency versus the prior quarter was driven by strong business cash flows and additional reinsurance credit.
Regarding our fourth quarter dividend enact is evaluating economic and business conditions, including the resolution of forbearance related delinquencies.
Assuming these conditions remain supportive enact intends to recommend to their board approval of a $200 million dividend.
Genworth would receive its pro rata share of that dividend based on its ownership interest of approximately $160 million.
Turning to the U S life segment overall results were solid in the quarter at $93 million driven by the continued strength of the LTC enforced rate action plan and variable investment income.
Mortality continues to be elevated in the quarter in part from Covid, 19, which negatively impacted our life insurance results.
Jim Carrey had adjusted operating income was $133 million compared to $98 million in the prior quarter and $59 million in the prior year.
As we discussed last quarter, our overall GAAP margins are slightly positive.
Tablets are GAAP only profits followed by losses reserve, which covers projected losses in the future.
As of the third quarter the pretax balance of this reserve was $1 1 billion up from $625 million as of year end 2020.
This reduced LTC earnings by $129 million after tax during the quarter.
Earnings from in force rate actions of 304 million prior to profits followed by losses increase versus the prior year.
Nine of the Investor presentation illustrates the strong quarterly earnings trends from our in force rate actions.
Choice one legal settlement that we discussed last quarter favorably impacted our results by $48 million or $16 million after profits followed by losses.
As of quarter end, 42% of the settlement class have reached the end of their selection period, and we expect the remaining class members to make their elections by mid 2022.
You also have an agreement for a similar settlement for Pcs, one and Pcs two policy forms just still subject to final court approval process underway.
Approved in a timely fashion, we expect claimants to start making their elections mid to late 2022.
At this time, it's difficult to assess the overall impact of these legal settlements will have going forward as full implementation will take another one to two years.
Shifting to enforce rate action approvals for LTC during the quarter, we received approvals impacting approximately $394 million of premiums with a weighted average approval rate of 30%.
Year to date, we received approvals impacting $871 million of premiums with a weighted average approval rate of 37%.
Up from the comparable period last year and.
We received approvals impacting $595 million in premiums with a weighted average approval rate of 29%.
A quarterly approval or uneven we expect approvals in the fourth quarter and 2022 to be strong based on pending filings and regulators recognition of the importance of actuarially justified rate increases for genworth and the industry.
We experienced favorable variable investment income in LTC again, this quarter, reflecting higher limited partnership income gains on treasury inflation protected securities and bond calls in mortgage prepayments.
While we have seen very strong variable net investment income. This year, we do expect this investment performance to moderate over time.
Claim terminations in the third quarter were higher versus the prior quarter and lower versus the prior year as noted on page eight of the investor presentation.
We did not materially adjust our previously established Covid reserve for mortality during the quarter.
As the pandemic continues to develop mortality experience may fluctuate in the near term and we will increase or decrease the COVID-19 mortality adjustment accordingly.
New active claims have trended up gradually in 2021, although incidence remains lower than pre pandemic levels and continues to drive favorable IV in our development during the quarter.
Pending claim submissions, which are a leading indicator of future new claim incidents increased during the quarter and versus the prior year.
We expect to complete our claims assumption review in the fourth quarter. All of this work is ongoing and not completed preliminary indications are that our claim reserve assumptions are holding up in the aggregate.
We also plan to complete our review of assumptions related to our active life reserves as well as loss recognition testing and statutory cash flow testing in the fourth quarter.
For these updates will generally not including data from 2020, or later and setting any long term assumptions as we do not yet have sufficient information around longer term effects of the pandemic.
As Tom mentioned, a key area of focus for this year. The active life Reserve review is the utilization trend assumption, which reflects our view benefit utilization will emerge in the future.
Although our recent utilization experience has generally been favorable we believe this is primarily driven by the pandemic and temporary in nature.
Another area of focus for the utilization assumption is the growth rate of the cost of care and our 2021 review as we compare our long term assumption for accumulated experience as well as the industry benchmarks.
While the expected change in the long term utilization assumption would significantly increase the $22 5 billion legacy shortfall as Tom stated, we plan to offset the increase to an expansion of our multiyear rate action plan.
You also continue to focus our discussions with regulators on refining options available to policyholders and responding to adverse changes in experience in a timely matter.
We expect to finalize our assumption review in the fourth quarter, and we will share more detail about these updates and associated margin impact at that time.
Turning to life insurance overall mortality for the quarter continue to be elevated versus historical experience, including the prior quarter and prior year.
Third quarter included an estimate of approximately $24 million after tax and COVID-19 claims based upon death certificates received to date.
And our term universal life and Universal life products, we recorded a $30 million after tax charge for DAC Recoverability up from 13 million in the prior quarter.
Charge offs continue to reflect the unfavorable mortality experience and continued block runoff.
Mike LTC would generally not including data from 2020, or later and sending any long term assumptions in life insurance. However, we're closely monitoring our elevated mortality experience in the context of the ongoing pandemic, including older age mortality as well as mortality improvement.
With respect to interest rates, we're focused on a long term view of interest rates and current portfolio yields.
On a statutory basis standalone testing of Universal life products Leverages, a prescribed interest rate and we expect the increased statutory reserves in the fourth quarter to reflect the decrease in this rate.
Any potential changes to our life assumptions could further negatively impact our statutory results.
<unk> GAAP earnings in the fourth quarter.
In fixed annuities adjusted operating earnings of $28 million for the quarter was higher sequentially driven by favorable mortality and a change in reserves related to the increase in interest rates during the quarter.
And the run off segment, our adjusted operating income was $11 million for the third quarter versus $15 million in the prior quarter and $19 million last year.
Real annuity performance was driven by equity market performance, which was unfavorable versus the prior quarter and the prior year.
Additionally, mortality in the corporate on life insurance products was unfavorable in the current quarter.
We expect capital in Genworth life insurance company or Glick as a percentage of company action level RBC to be approximately 290%.
Up from 272% at the end of the second quarter.
Driving this result, as U S life statutory earnings, which continued to benefit from higher LTC earnings from the impact of in force rate actions, including the benefit from the choice one legal settlement.
Absent these rate actions statutory losses over the last few years would have been significant as noted on page 11 of the investor presentation.
Statutory earnings for LTC are generally higher than GAAP earnings as the concept of profits followed by losses I discussed earlier does not exist for statutory accounting.
Page 12 of the Investor deck highlights recent trends on a quarter lag statutory performance for the consolidated life companies.
<unk> earnings are also more aligned to taxable earnings which have resulted in strong cash tax payments to the holding company over the last few quarters.
As Tom noted with the implementation of <unk> on a U S. GAAP basis, we plan to highlight the statutory results our U S life insurance business as a part of our quarterly earnings process going forward.
Rounding out the results adjusted operating income in corporate and other was $1 million and was improved from last quarter in the prior year, driven by lower interest expense and a favorable tax adjustment.
Turning to the holding company, we ended the quarter with a very strong cash position of 638 million with no debt due until our $400 million maturity in August 2023.
As Tom mentioned, we've retired more than $1 5 billion of debt during 2021, while maintaining prudent cash buffers for forward debt service obligations.
This is outstanding progress toward a priority of reducing holding company debt to approximately $1 billion.
Page 13 of the Investor presentation provides the detailed quarterly cash activity for the third quarter, most notably the net proceeds from the enact IPO were $529 million, which enabled the full retirement of the Axa promissory note of $296 million.
Intercompany tax payments were $96 million during the quarter and reflected the strong underlying taxable income of enact in U S life.
We expect cash tax payments to continue in 2022, although at reduced levels as U S life trends normalize over time.
We continue to optimize Genworth group taxable assets and do not anticipate paying federal tax in the near term.
With our improved liquidity position, we intend to retire our 2023 debt maturity once enact declares their dividend moving us $400 million closer to our debt target.
Then anticipate retiring the 2024 debt maturity, leaving an improved debt ladder with the next maturity not until 2034.
In closing once we've achieved our goal of reducing holding company debt to approximately $1 billion will be positioned to return capital to shareholders dividends from enact our main source of cash flow for the foreseeable future and I expect that we will have a further assessment of the future dividend stream in the next several months.
When you weight that view, we continue to evaluate the optimal approach for shareholder returns.
Our approach will be to find opportunities to return capital to shareholders I'll fill building value over the long term.
With that we will now open the line for questions.
Thank you ladies and gentlemen, we will now begin the Q&A portion of the call. As a reminder, please refrain from using cell phones speaker phones or headsets. Please press star one to ask a question.
So at any time. Your question has been answered or you would like to withdraw. Your question. Please press star two to be removed from the queue.
Please press star one now.
We'll go first to Ryan Krueger with <unk>.
Hey, guys. Good morning, I have a few questions since it's been a while maybe.
Maybe first could you just provide an update on the status of the Axa counter lawsuit against Santander.
And any sense of.
When this.
<unk> can be made and.
How much potential recovery you could you could get.
Yes.
So Ryan I'll take that one it's a good question, we get we get it often so I would say that that axa send them there.
Litigation process is going through the UK courts, you you'd normally expect.
18 months 24 months for it to be resolved.
Our understanding is given COVID-19, and the U K I'm sure. It's the case in the U S as well that.
The court dockets on this litigation are more challenged than than they used to be so.
Uh huh.
The guidance would be.
A couple of years on from when it started which was January of this year could be delayed.
More than normal because of the COVID-19 backlog.
In terms of amounts we paid significant amounts to axa under our guarantee.
And if the Axa wins and the litigation, we would expect the amounts that we paid.
We would.
We have the ability to ultimately.
Recover a significant amount, but that really depends on how litigation goes and so it's pretty hard for us at this point to assess but I would say depending on how the.
Litigation process goes there's a potential for significant upside.
Depending on how the case plays out.
Thanks.
Another question was on <unk>.
Targeted debt as well as capital return.
I guess.
Maybe the question is.
The long term is your plan to eventually fully separate enact.
And I guess if so.
I would I would think the goal would be to pay down debt to zero to enable that to happen so kind of.
Telephone and update on that in regards to your ear.
Statements on a $1 billion long term debt target and returning capital to shareholders.
Yeah.
Thanks, Brian I'll take the first part of that and maybe ask Dan to comment so our goal is to get.
The long term debt to around $1 billion range and that's been as you know a target for a while.
<unk>, we're talking about 900 million.
So when we get the debt to the 2034.
And the $20 66.
<unk> $900 million, obviously, a very long time before we'd have to make any principal payments.
At that level of debt I think the interest payments are in the $40 million range, so very manageable.
<unk>.
For us so that that's sort of why we have that are as <unk> as a target.
Longer term you know.
We could keep our 81, 6% of an app or we said for the foreseeable future.
We obviously have options too.
Either.
Spin off.
Talked about that the 81, 6% to shareholders on a tax free basis.
Pending on where we are down the road.
That could be an attractive option. There there are obviously other options I do think youre right that in terms of our long term goals.
We want the U S life companies to be able to stand on their own.
And right now because we don't anticipate any dividends from the life company.
That would mean the life company couldn't carry any debt however.
You know as Ive talked I talked about on the call and I've talked about before to the extent that are the new business opportunities we see in LTC.
We think there are attractive and over time.
If the life companies through the the new growth business and capital produced from that.
It could be that the life company could handle some debt in the future, but but absent an ability of the life companies to pay dividends and that would be from the new business not from the legacy companies.
But absent dividend flow from the new companies the life company really can.
Can have significant depth.
Dan you want and then adjusting to that go ahead.
Yeah, Yeah, I would just reiterate that once we pay off the 20 threes in the 20 fours. We've got 10 years plus of runway with that service in the $35 million to $40 million range to give us the utmost flexibility and so.
If ultimately life companies can support that level of debt service, we would have the option to spin off the company.
If they cannot then I think the point is right that we would look at potentially paying down the rest of the data that was still our goal.
One last question is and I know this is somewhat challenging but.
Can you give any sense of in a more normal year I guess without COVID-19.
What level of cash tax inflows as you might expect at the holding company.
Dan I'll, let you take that one good question.
Yeah. So the tax question. It really is a question that's really directly tied to earnings and we haven't provided for guidance on earnings, but I can give you a kind of a rule of thumb way to think about the taxes.
What I would do there is just break it into two parts and I would look at your modeled earnings for enact them at at around the 2021% tax rate to a normal tax rate there.
That'll get you in the ballpark for what we would expect and <unk> payments to the holdco to be.
Obviously adjusting for our ownership interest on the life side, we do have some sort of legacy issues from.
Forward, starting swaps and others that are taxed at a higher rate. So the tax rate for the life side is going to be a little bit higher than 21%, but the way I would think about this is not so much looking at GAAP earnings. We're looking at Stat earnings and that's one of the reasons why we've added the profits followed by losses information to our presentation and to our materials.
And if you look at this quarter, we had $129 million after tax and profits followed by losses and so if you want to sort of convert to an approximation for what the stat earnings would likely be and just use a slightly higher tax rate those two components when put together get you really right to the.
The approximate tax number which is the the cash payment to the holding company. So as you look at what your modeling going forward and you issue those rule of thumb I think you'll get pretty close.
That's helpful. Thank you.
Okay.
Thank you we will take our next question from Ryan Gilbert with BT IAG.
Hi, Thanks, everyone. Good morning.
My first question was on me on on the debt maturities.
Appreciate.
Any color around the 2023 note do you have any.
Any I guess timing that you can offer.
On when you intend to retire the 'twenty 'twenty four and maturity.
Yeah, and I think that's a good question for you.
Yeah, you know I think if you look at our cash position.
As at the end of third quarter, we're obviously in very good position to pay off the 20 threes well, what we said is that we will.
Pay off the 20 threes once enact declares a dividend that would give us approximately.
$400 million.
If you just sort of add third quarter cash plus the the dividend, which puts us in a position to be set up reasonably well for the 20 fours, but the timing of paying off. The 24 is first of all we have a lot of time.
Now in the 2020 for maturity I think we will balance a number of factors, including what the cash flows look like quarter by quarter. So at this point I think it's our expectation we'd be in a position to pay that off early but we're not yet ready to declare timing as it relates to that but certainly if if fourth quarter goes as expected and we do get.
The dividend ultimately from an act will be a lot closer to being able to provide guidance on that.
Okay, Great. So point point being those that you feel comfortable that you can prepay that and youre not going to pay down our maturity got it.
Second question is on on can you can you remind us what.
Your NOL position looks like and.
The extent that that your Nols are contributing.
Contributing to the cash tax payments that youre getting from the subsidiaries.
Yes sure Great question.
What what I would say is that as of third quarter, we have effectively used.
All of the tax assets that are on the balance sheet.
And we're really into sort of normal tax planning mode and what we've said is that we in the near term do not expect it to be a cash taxpayer at the federal level, which means that we do have sort of normal cast plant our tax planning strategies that we're implementing that will allow the cash to come to the holdco.
At least in the near term so, but I think in the medium term to the extent that we continue to see very strong earnings from both in App and life companies I think ultimately will be a cash taxpayer.
Okay, Great last one for me is on the shortfall in the LTC business I think over the last few years. The gap has been around 8 billion is is that how we should be thinking about it for them.
For us we.
As we get into the fourth quarter in 2022 or do you think that the increase that you're that you're telegraphing here it could be.
Outsized relative to what we've seen over the past couple of years.
Yeah.
Well.
You're right.
Well I think what we've said is we do think the benefit utilization trend that we're looking at.
<unk> is a significant assumption and if we ultimately we're still reviewing that obviously, we're still in the middle of the fourth quarter, but if we change that that could be significant what we've also what will what we will.
Also sad is to the extent that we do make a change.
We do think will be totally able to recover that dollar for dollar with an expansion of our multi year rate action plan. So it.
I think because we've had so many questions over the years how should.
Investors.
Understand where we are I do think.
A convenient way to look at it.
The economic basis is what is the shortfall.
And then what is the net present value that we've achieved is and so that gap as you said, it's very at the end of the third quarter, it's lower than where it was at the end of last.
Last year. So it was $22 5 billion lost 16.3, or six point too, but it has been you know a different amount than that it's been a there's been nothing you have.
You go back several years, it's been 10, so I think what's it's less important I think what the gap is its more important do we think are worth.
Working with regulators.
We can recover that in terms of future premium increases and the one thing.
And I I did.
The insurance regulator, so some of them on the call.
We've really over a long period of time now eight.
Eight or nine years that we've been working on it we have a very good relationship with the regulators in all 50 states.
There are still some states that are ahead of others states on what they've granted but generally I think they're all stepping up.
Their goal and our goal is the same which is to provide them.
Premium increases benefit <unk> benefit reductions in the future that allow us to pay.
Pay off all the claims and as we've now paid.
Around 330000 claims I think its around 23 billion for long term care.
And it's based on that evolving claim experience that we we look at an update the assumptions and then we we talk with the regulators I think if you ask regulators they would say for Genworth and all LTC insurers. They're also looking at the benefit utilization trends we have.
<unk> seen recently, particularly.
And.
Whats driving some of the.
The changes we are seeing is.
You have seen in many states.
Uh huh.
The states raising the minimum.
Uh huh.
Minimums to about hourly rates to about $15 an hour and as you know a lot of in home care Governors also thing caregivers in nursing homes that they tend to be.
Impacted by the rise and those are minimum so I do think we've seen in the last few years as many states have moved from I guess, the federal rate seven $7 25 to 15, we have seen an increase in costs.
At some point, we would expect that to revert back and then you have the other competing challenge of I think the fed in the U S and in many central governments have struggled to get to their long term inflation rate of 2%. They haven't been able to achieve that and then significantly low.
Sure although recently in the last six.
Six months to 12 months supply chain and other issues that have caused inflation hasn't seemed to be in the 5% range. So all of that is what with Dan and our team are looking at in terms of what we need to do on the benefit utilization, but I think the bottom line I think for investors is we do expect that.
Whenever whatever changes we make if we make a change could be material, but that we would be able to expand the my wrap to cover that.
Okay understood I appreciate it thanks very much.
Thanks, Brian.
We'll take our next question from Joshua <unk> with credit sites.
Hey, good morning, I. Appreciate you taking my question sort of a follow up too.
The question, just a little while ago, but can you give us a sense of either the magnitude of the strengthening or alternatively, where the benefit utilization trend assumption is currently versus where it might be set and sort of a follow up to that how you expect.
The reserve strengthening to impact the life companies ability to send tax sharing payments to the parent either for the fourth quarter or into next year. Thanks.
Yes.
Yeah. So it's a good question. It's a very complicated question. The first thing I'd say is.
November 3rd So we're we've got quite a bit of work still to do.
To make an ultimate decision on that I do think based on what we're saying, it's more likely than not that will make a change and that benefit utilization reserve.
But again this is a this is a margin testing issue.
So this is not related to current U S GAAP earnings or statutory earnings.
This would be if we make the change we will pay those claims over a long period of time.
And we've got a long period of time to cover the bulk of those costs through premium increases or benefit reductions I would not expect Josh that the.
Those changes would have a material impact on statutory earnings for the balance of this year or next year and we've yes. We did give you on that slide 11.
Some of the trends.
So I think this is a margin long term cash flow impact down the road it isn't so much.
It will impact our short term earnings short term earnings are based on the actual claims you pay.
And so to the extent, we weren't able to.
To assume we can recover.
Uh huh.
Those that increase in reserves go through through future payments.
And ultimately had a premium deficiency, we didn't have a positive margin that that would have a short term impact. So I think from a if you look at earnings in the next in the near term.
They won't be significantly impacted by these changes.
If we make the change.
Got it. Thank you I appreciate the color and just to make sure I understood correctly. What you just mentioned so you see the your base expectation at least at this point I recognize there's still work to do is that there would still remain a.
Greater than zero margin for.
Reserve testing purposes inclusive of a revised my wrap plan correct.
Well, Yeah, I would say just with the caveat, let us do the work and we've got you now.
A ways to go but but basically you know we assume that.
Whatever changes we may make a will expand the my route.
And you know I think basically.
As you've seen the U S GAAP margin and the statutory margin are different because the testing or different ones pretax ones after tax.
One has prescribed statutory interest rates. The other has the portfolio right. So there's a lot of complexity.
But I, but I would say that you know the bottom line is that we would we would expect that.
From a margin perspective.
That whatever changes we make on assumptions, assuming we can recover and we're confident of that they're there.
There wouldn't be a material change in the margin and we would we would expect after.
After we complete the analysis with the caveat that went out there and things could change that.
The margin.
Likely both on the loss recognition testing in the U S. GAAP margin the stat margin would roughly be in the range as they've been and obviously, we have pretty broad we have a range of five.
For the U S. GAAP margin 500 millions of $1 billion and so we would expect after whatever changes we're gonna make assuming we can expand the my reps for the margin to be somewhere within that range.
Yeah.
Very helpful. Thank you very much.
Yes.
Youre welcome to us.
Ladies and gentlemen, we have time for one final question from Geoffrey Dunn with Dowling and partners.
Thanks, Good morning.
If youre able to retire year 'twenty threes. After the enact dividend can you share any estimate a make whole and potential accrued interest at that point on top of principal due.
Good question, Jeff I'll give that to Dan.
Yes, Thanks, Tom.
Certainly it depends on the.
Level of interest rates at the time, but I would expect that number to be.
Between 30 and $40 million.
Yeah.
Okay, and then can you also remind as we consider the potential for early on the 20 fours.
The liquidity target you're aiming to have at the Holdco.
Yes, I mean, what we've said generally speaking is that we'd like to have two times debt service coverage as our as our level of debt has come down.
We've sort of thrown a number out there around $200 million certainly as we pay down the 20 threes in 'twenty four as we would revisit that and there will be opportunity to reduce that but but at this point, we're still thinking about the number around $200 million.
Okay. Thanks.
Ladies and gentlemen, I will now turn the call back over to Mr. Mcinerney for closing comments.
Okay. Thank you very much and I want to thank all of the people on the call today for joining our call I also want to.
Thanks.
The two Ryan's, Josh and Jeff or what I thought were excellent questions are right on point and hopefully we've been able to to answer those well you know the bottom line is I think we had an excellent third quarter. We've had a good year so far through the nine months.
Yeah, we're very happy with the operating results the progress we've made against those five strategic priorities and we're very excited that we've we've had a turning point and going forward you know, we're pretty positive on genworth future.
And obviously when we look forward to talking to you again next quarter.
Give me an update and.
And talk about you know, where we are against executing on those priorities. So with that thank you. Thanks for your interest and support of Genworth.
And I'll turn the call back to Katie to end the call.
Thank you ladies and gentlemen, this concludes Genworth Financial's Financial's third quarter conference call. Thank you for your participation at this time the call will end.
Okay.
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