Q4 2021 Genworth Financial Inc Earnings Call

Ladies and gentlemen, and welcome to Genworth Financial's fourth quarter 2021 earnings conference call. My name is Jennifer 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, this conference is being recorded for replay purposes also we ask that you refrain from using cell phones.

Speaker phones or headsets true Q&A portion of today's call.

Now I'd like to turn the presentation over to Sarah cruise director of Investor Relations MS. Crude you May proceed.

Yes.

Thank you operator, good morning, and welcome to Genworth 's fourth quarter 2021 earnings.

All of our speakers I wrote this morning, and we ask that you would use any sound quality or technical issues that may arise 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.

Following our prepared remarks, we will open the call up for a question and answer period. In addition to our speakers Brian had to guess president of our U S life insurance segment and your own updated Deputy Chief Financial Officer will also be available to take your questions.

A slide presentation that accompanies this call is available in the Investor Relations section of the Genworth website, investor Dot Genworth Dot Com our earnings release and financial supplement can also be found there I mean encourage you to review this material.

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 in our most recent annual report on Form 10-K as filed with the S E T.

This morning's discussion also includes non-GAAP financial measures that we believe may be meaningful to investors in our financial supplement earnings release, and Investor materials non-GAAP measures have been reconciled to GAAP, where required in accordance with S E World.

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.

Good morning, everyone and thank you Sarah and congratulations on your promotion to head of Investor Relations for Genworth.

Sure.

With Gen one's for 10 years since she held several leadership roles at Genworth Finance organization.

Genworth and our two businesses very well.

We refresh downwards board of directors over the last two years with the addition of four new directors, who received strong support of Genworth made 2021 annual shareholders' meeting.

As more fully described in our proxy statement issued last April our new directors bring excellent credentials to the board and they've already stepped up to challenge management and guide the company forward.

I also want to welcome two new outstanding job with leaders to the C suite effective on January one of 2022, well, let's say heck I meant Greg Terawatts.

It wasn't what was appointed executive Vice President and Chief Human Resources Officer.

A strong advocate for our people and I understand the vital role they play in delivering great results and implementing our vision for the future.

He has played a leading role in Genworth HR team, including working with generous various businesses and functional units. She will focus on our post COVID-19 strategy.

Turning to work arrangements talent management intelligent talent development of John was key leaders and managers.

Greg was named Executive Vice President and General Counsel, Greg hails from Brooklyn, and has a strong litigation background. He lead Gen was litigation function for many years. He was also instrumental in the resolution of the absolute litigation with Genworth and as Genworth Genworth, Chief liaison with Axa and their ongoing legal dispute with Banco Santander.

Sure.

Greg has also been the top legal officer for Genworth U S life Division for many years.

Let me now GA Jan was outstanding performance for the full year 2021.

Genworth U S. GAAP net income for the full year was $904 million adjusted.

Adjusted operating income for 2021 was $765 million.

Adjusted operating income was $1 48 per share, which was well above analysts expectations and our own internal projections.

These outstanding results were led by a record year for net.

Adjusted operating income available to Genworth shareholders in 2021 was $520 million.

U S life and run off achieved excellent financial results. During 2021 full year adjusted operating income for U S life and runoff combined with sooner than 'twenty 1 million led by strong LTC adjusted operating income of 445 million for the year.

Because of the upcoming significant changes to the life insurance industry's U S. GAAP accounting regime based on new long duration targeted improvements or L. D. T. I rules Genworth will also be highlighting U S life statutory results.

Additionally, U S insurance regulators focused on U S statutory results when assessing the financial condition and performance of life insurers. Therefore, because of the importance that insurance regulators put on statutory accounting and the fact that future statutory results will be based on a consistent methodology, we think that highlighting these results going forward.

Ward will provide important additional information for shareholders and investment analyst.

We have included our statutory information through September 2021 on pages, 15, and 16 of the Investor deck.

While our fourth quarter statutory processes, including cash flow testing are still in process. We do expect U S life statutory after tax net income for the full year to be approximately $660 million.

Net income result was driven by outstanding results for LTC with pretax statutory income of approximately $910 million in 2021.

The glib consolidated statutory balance sheet was significantly strengthened this year, we expect <unk> capital surplus to increase from $2 1 billion at the end of 2022, approximately $2 9 billion at year end 'twenty 'twenty. One similarly looks negative unassigned surplus is expected to improve from negative $1 8 billion.

To approximately negative one point.

The 1.0 billion that you're at.

Alex RBC ratio at year end 2021 is projected to be approximately 290, an increase of approximately 61 points from 229 at the end of 2020 the.

The second of improvements in the Glick RBC ratio and statutory balance sheet were driven by excellent statutory net income in 2021, primarily from the strong LTC results.

Year end statutory results in RBC calculations are preliminary as they are still under review.

And they will be fine.

With our year end statutory filings I'm very pleased with our strong statutory results for the year.

Moving on from our strong 2021 financial results I wanted to provide an update on the five strategic priorities, we announced last year.

The first strategic priority is to maximize the value of our equity position in an app to benefit our shareholders.

Genworth Board considered several different options for an act in 2021 .

Selling 100% of the Nat maintaining 100% ownership.

Before deciding ultimately to move forward with a partial IPO.

Our objective has always been to protect and ultimately a lock in X value, enabling us to maximize value for genworth shareholders over the longer term.

The various third party sale of transactions, we considered where either not supported by regulators or involves significant regulatory risk, which we would potentially delay the timing of returning cash proceeds to genworth shareholders.

Somewhat therefore decided to proceed with the partial IPO and sold approximately 18, 4% over that shares which we believe was the best viable option for shareholders.

<unk> was 81.6% retained interest will allow us to receive significant future cash flows from an app to enable delevering at Genworth and return of capital to Genworth shareholders. At the same time, we retain future optionality with our holdings in <unk>, including a tax free spin off to genworth shareholders as well as other options.

Genworth has decided that retaining our current holdings and act for the foreseeable future is the best option as we achieve our debt targets and return capital to Genworth shareholders. We will continue to be open to other options in the future in the interim we believe and act as various levers to great you're in long term value in general It will continue to advance initial.

Does that support an X value as the majority owner like debt reduction at other levers to further improve holding company, our holding company ratings, which we'll discuss later.

I'm extremely proud of the significant progress achieved in 2020 one on our second strategic priority, which is to reduce genworth holding company debt to approximately $1 billion.

This has been a long term objective for the company because this amount of debt is much more appropriate given genworth annual operating cash flows to the parent holding company.

We reduced our outstanding debt by approximately $2 1 billion last year.

Including paying off the extra promissory note and redeeming the $400 million of parent holding company debt due in 'twenty two 'twenty three.

We now have approximately $1 2 billion of parent holding company debt outstanding.

However, because genworth ended the fourth quarter with cash of 356 million. Our net debt position is already below 1 billion. We will look to continue to reduce our debt to meet our target in the near term.

Looking at other key indicators of balance sheet strength, our U S GAAP debt to capital ratio at the end of the year was 13% one of the lowest among life insurers that report. This metric looking ahead, we expect <unk> interest coverage ratio to improve significantly.

After we retire the remaining of Genworth too.

280 million of debt due in 2024, our pro forma cash flow coverage will be approximately five times based on a conservative view of projected future cash flows.

We are hopeful that with a substantial reduction outstanding parent holding company debt in 2020 , one our improved cash interest coverage ratio significant excess cash available to repurchase our outstanding 2020 for that long duration of the remaining 2034 in 2066 debt and the expectation of continued.

<unk> U S statutory net income that the rating agents will continue to upgrade the parent debt ratings over time.

The third strategic priority is perhaps the most important priority for the next several years since the end of 2012 Genworth has made outstanding progress on moving the legacy LTC portfolio closer to breakeven.

We continue to define our multiyear LTC rate action plan or my route.

During 2021, Genworth delivered a new record for approved LTC rate increases of 403 million from 45 States on 173 separate rate filings. The net present value of the 2021 LTC rate increases was approximately $2 3 billion.

During the fourth quarter annual LTC assumption review we.

We've made long term assumption changes mainly to our benefit utilization trend assumptions based on cost of care growth.

What are your 'twenty, one margins reflect the updated unfavorable benefit utilization tried assumptions fully offset by higher more model future in force rate actions.

Our 2021 LTC margins remain positive in the half a million to one half of 1 billion to $1 billion range and the assumption update did not cause the financial statement impact in the quarter.

Dan will review the assumption changes in more detail during his remarks.

We have the strongest and most experienced LTC premium increase team in the industry led by Jim all of our land to Molla and her team are continuously improving the LTC projection models to capture more accurate data in determining the level of actuarially justified premium increases to request.

Regulators have a high regard for Genworth LTC projection models, which have made the premium approval process more efficient.

These models have also helped us update the level of that present value of MPV.

From prior approved premium increases and benefit reductions given our new cost of care assumptions. In addition to the approximately $2 3 billion MPV benefit from the $403 million of approved increases in 2021 but models project based on the latest assumption changes that the MTV achieved since 2000.

12, as improved by an additional two 8 billion compared to our earlier projections as of the end of 2021 dealt with now projects that the LTC premium increases and benefit reductions achieved since 2012 has approved the legacy LTC portfolio by 19.6 billion.

On a net present value basis.

This is a $5 1 billion increase from the 14 and a half billion that reported at the end of 2020.

I'm incredibly proud of the progress we've made towards stabilizing the legacy LTC book through our holistic approach.

Look forward to sharing further updates in the future.

The fourth strategic priority is advancing Genworth LTC gross initiatives.

This is an important long term priority because we believe that that genworth can only stand on its own without ongoing support from an act dividends. If we bring the legacy LTC portfolio closer to breakeven and develop a viable growth strategy that genworth investors believe is sustainable.

If we can achieve both objectives that would facilitate the future spin off the Genworth 18, 81, 6% of an act because of the remaining genworth business would be viable as a standalone public company.

To support our growth strategy, we are in the process of standing up a new business line Global care solutions, and we have hired Yost vitamin C. E O to lead Genworth LTC growth initiatives that will be developed within the new business line.

This is approximately 30 years of experience in the insurance industry has worked for both large global insurers and perpetual capital is focused on new health insurance models in emerging markets.

<unk> worked with me at LNG group for over a decade, including stands helping me oversee <unk> worldwide insurance and investment management businesses and over 40 countries and restructuring of LNG is very large side agency distribution channels and the emerging markets in Asia, Latin America and Eastern Europe .

After leaving I N G. In 2014, Joseph <unk>, Chairman and CEO of Unity, a mutual life and health insurer in the Netherlands. He was working with Dutch veteran capitalists to develop a new digital health insurance venture in East Africa in 'twenty 'twenty until the COVID-19 pandemic halted that venture I'm very pleased we're able to recruit Yost.

In 2020, as an outside consultant to help us develop our LTC growth strategies and that he will now be overseeing the implementation of those strategies as the CEO of global care solutions.

Because of the geopolitical challenges between China, and the U S. We have reduced our focus on China opportunities until those issues become more transparent.

We have redirected our focus on two new U S. LTC businesses as part of our new Global care solutions. The first business will offer fee based advisory consulting and services and the aged care space, we see meaningful opportunities to provide advice consulting and services to address the needs of the elderly Americans their caregivers and their family.

Please.

Genworth Carescout subsidiary led by Ed Mother Way currently provides some of these services acquired by Genworth. Since 2008 first scout as a market leader in providing LTC care assessments and care support through our network of 35000 Collette clinicians nationwide.

You also know that we'll work together to further develop the long term opportunities for care scope.

<unk> has not funded care scaled over the last five years as our focus had been directed towards seeking premium increases on our legacy LTC portfolio.

We see tremendous potential in the business as part of our LTC growth strategy. So we are making an investment of approximately $8 million in care scout in the first quarter to expand its clinical assessment capabilities and care support solutions.

This investment will allow carescout to extend their assessment services to help support the many health care organizations that are experiencing a high volume of patients ongoing assessment staffing shortages and numerous workforce disruptions due to the COVID-19 pandemic. We expect this investment to triple the annual assessment revenues.

In the next few years from approximately.

Approximately $30 million.

Longer term care scout and its future service affiliates are expected to provide a diversified source of capital light fee based revenues as we deploy new capabilities and solutions to meet the needs of a growing marketplace. We have several significant elder care capabilities and experience that other competitors do not have.

Including 40, plus years of experience in the LTC insurance business data on 330000 LTC claims paid to date is the legacy LTC policyholders.

Existing relationships with a network of 35000 care assessment professionals, who are mostly registered nurses and existing relationships with 90000 providers and caregivers throughout the U S.

<unk> got another service strategies are based on converting these considerable capabilities into a viable and scalable advice consulting and service businesses for the elderly and their families.

The second LTC growth business strategy is based on transforming the existing LTC insurance market.

The new Genworth LTC products to be sold on the market will be designed to solve the myriad of issues that have plagued our legacy LTC insurance business. The most important change is to transform the LTC insurance market is to implement an annual rerating model.

<unk> believes the primary problems with all insurers legacy LTC insurance products were caused by the level premium regulatory model.

Legacy LTC products were sold pursuant to a regulatory regime designed to make premium adjustments difficult to obtain even though it is impossible to price products with assumptions that will hold and of course, they did that hold for 30 to 40 years.

We are in the process of finalizing genworth person, who LTC individual insurance product the new product is priced for a mid teen return using pricing assumptions that we believe are conservative.

Our product is a maximal lifetime benefit of 250000, and the pricing assumptions for the key LTC with where interest rates lapses morbidity and mortality are based on Genworth current experience and projections for these factors. However.

However, because we understand that these pricing assumptions may not hold over the next 30 or 40 years.

We'll only write new business in states that will allow annual review it re re rating who changed premiums if pricing assumptions and market reality defer overtime.

We have had extensive discussions with regulators and we believe enough regulator support the concept of annually ready to move forward with the product however, because of regulatory issues with the need for large premium increases on Genworth legacy books and the need for many states to change their current rate stabilization rules, some of which require a legislative acts.

We do not expect to be able to launch the new LTC products in most states right away.

We may however decided to accelerate the launch with a handful of states, who seem enthusiastic about bringing our new innovative LTC product into their states insurance market.

I believe that these innovative food and thinking states can help rebuild our robust long term care insurance market that contributes to solving the massive long term care funding crisis facing the country.

That is at the core of generalist multifaceted growth initiatives.

<unk> current financial strength ratings are also an issue for the viability of the new LTC products.

As a result last year, we have been working with.

A third party reinsurer with an a plus rating from a M. Best we have a new general insurance company, which will only write new business and will not have any legacy LTC business, we expect that 75% of the risks with a new LTC products will be reinsured with AA plus rated reinsurer.

Though the level of reinsurance, we expect to be reduced to 50% over time for.

Preliminary discussions with a M best ever provided a good understanding of their methodology around investment grade ratings.

Genworth expects to offer several additional new and innovative LTC products, including hybrid products and a non guaranteed LTC benefit product in the future.

Genworth fifth strategic priority is returning capital to our shareholders.

Given that our NEP has the net debt position is now below $1 billion and we expect an active share their dividends and dividend policy. Later this year, we plan to consider initiating our capital management program. Later in 2022 will have an update on Genworth capital management plans on the next earnings call.

In closing I'm very pleased with the strong operating performance and the progress on our strategic priorities achieved in 2021, we've made outstanding progress in Genworth turnaround and I remain confident in our plans to drive shareholder value and with that I'll turn the call over to dad discuss our fourth quarter results and financial position.

More detail.

Yeah.

Thanks, Tom and good morning, everyone. The fourth quarter was another excellent quarter for Genworth with net income of $163 million and adjusted operating income of 164 million or <unk> 32 per share.

In the fourth quarter. We also continued to make significant progress on our debt management strategy in this quarter alone. We fully retired $400 million of debt due in August 2023, and reduced our February 2024 debt maturity by $118 million for a total of $518 million.

Even with this debt management activity, we ended the quarter with a solid holding company cash and liquidity position of $356 million.

Turning to the operating companies our mortgage insurance subsidiary and Act Holdings hosted its earnings call earlier. This morning, and provided a detailed update on its results for the quarter. So I'll focus on the key highlights.

For the fourth quarter and Act reported adjusted operating income of 125 billion to Genworth and a strong loss ratio of 3%.

Driven in part by a $32 million pre tax reserve release on pre Covid delinquencies.

I'll note that Genworth fourth quarter adjusted operating income excludes 18, 4% of minority interest, which accounted for 29 million of adjusted operating income.

Last quarter minority interest accounted for only $4 million of adjusted operating income due to the timing of the initial public offering in September .

Absent minority interest in <unk> adjusted operating income increased largely driven by the favorable reserve development in the quarter.

And <unk>, 9% year over year increase in insurance in force growth driven in part by 21 billion of new insurance written in the quarter.

In addition, an act finished the quarter with an estimated P. Myers sufficiency ratio of 165% or approximately 2 billion above published requirements.

The decline in the P Myers sufficiency versus the prior quarter was largely driven by the dividend paid in the quarter.

Subsequent to the quarter and January enact executed in excess of loss reinsurance transaction, which will cover the 2022 production and is expected to provide approximately 300 million and P Myers credit.

Reinsurance transactions are a key part of their credit risk transfer program that is designed to provide cost effective capital relief and reduce loss volatility.

We're very pleased with <unk> performance for the full year and the fourth quarter, which included the payment of its first dividend as a public company. The $1 23 per share dividend generated 163 million for Genworth with respect to our expectations for future dividends from an act enacted evaluating its dividend policy and expects to initiate a regular common dividend.

And around mid 2022.

Turning to the U S life insurance segment, we reported $41 million of adjusted operating income in the quarter driven by the continued strength of LTC earnings for the multi year rate action plan.

<unk> investment income.

Mortality continues to be elevated in the quarter in part from Covid, 19, which benefited LTC earnings, but negatively impacted our life insurance results.

<unk> in the quarter also included charges in our term universal life, and Universal life insurance products of $102 million related to assumption updates and DAC recoverability testing.

And our long term care insurance business, we reported strong results with fourth quarter adjusted operating income of $119 million compared to 133 million reported in the prior quarter and $129 million in the prior year.

As we discussed last quarter, while our overall GAAP margins are positive we've established a GAAP only profits followed by losses reserve, which covers projected losses in the future.

This reserve reduced LTC earnings by $121 million after tax during the quarter.

As of year end, the pretax balance of the profits followed by losses Reserve was $1 3 billion up from 625 million at year end 2020.

Our fourth quarter adjusted operating earnings from in force rate actions were $296 million after tax and before applying profits followed by losses, which increased from $225 million in the fourth quarter of 2020.

Page 12 of the Investor presentation illustrates the strong full year earnings trends from our in force rate actions and a $1 2 billion dollar benefit in 2021.

The legal settlement on our LTC choice one policy forms continued to favorably impact our results by $57 million or $14 million. After profits followed by losses. This quarter. The choice one legal settlement applies to approximately 20% of our LTC policyholders as of quarter end approximately 65% of the settle.

And then class had reached the end of this election period.

We currently expect the remaining class members to make their elections over the course of this year.

There are two other similar legal settlements pending the one for our Pcs, one and Pcs two policy forms comprises approximately 15% of our LTC policyholders and is subject to final court approval should the settlement be approved in the near term, we expect claimants to start making their elections in mid to late 2022.

Additionally, we've reached an agreement in principle for a settlement on our choice to policy forms which covers approximately 35% of our LTC policyholders, whereas many policies as the two other settlements combined the choice to settlement is still subject to the execution of a formal agreement.

Schedule, an ultimate approval.

Subject to these events, we anticipate that we'll begin implementing an approved settlement by early 2023.

While our financial results in 2021 had been favorably impacted by the choice one legal settlement and the other two settlements are expected to positively impact future financial results.

Difficult to quantify the overall impact on our financials.

Full implementation will take several years and is subject to specific policyholder elections.

In terms of LTC enforced rate action approvals. It was a record year for Genworth due in part to regulators recognition of the importance of Actuarially justified rate increases for Genworth and the industry.

During the quarter, we received approvals impacting approximately 223 million of premiums with a weighted average approval rate of 36%.

On a year to date basis, we received approvals impacting nearly $1 1 billion in premiums with a weighted average approval rate of 37%.

This is favorable compared to the prior year, when we received approvals impacting $1 billion in premiums with a weighted average approval rate of 34%.

We experienced favorable variable investment income in LTC again, this quarter, reflecting higher limited partnership income gains on treasury inflation protected securities bond calls in mortgage prepayments.

We saw a very strong variable net investment income in 2021, which is not subject to reductions from profits followed by losses. We do expect this investment performance to moderate over time.

Claim terminations in the fourth quarter higher versus the prior quarter and lower versus the prior year as noted on page eight.

We made a minimal adjustment to our previously established COVID-19 mortality reserve for the quarter decreasing the cumulative balance to $134 million.

As the pandemic continues mortality experience may fluctuate in the COVID-19 mortality adjustment would be reduced if mortality experience becomes unfavorable.

Turning to page 11 of the Investor presentation.

New active claims are higher than the prior year, but new claims incidence experience remains lower than pre pandemic levels and continues to drive favorable incurred but not reported or I b and our claim reserve development in the fourth quarter given the gradual increase in incidence we reduced our COVID-19, I B and our claim reserve by $34 million.

Resulting in a cumulative balance of $75 million.

We completed our annual review of key actuarial assumptions in each of our product lines during the fourth quarter, our assumptions for LTC claim reserves or disabled life reserves held up in the aggregate and the margin for policies not yet unclaimed included in our active life reserves remains positive. Therefore, we did not increase our reserves.

And there was no P&L impact from these updates.

Please note that the COVID-19 pandemic impacts to the businesses were not considered when reviewing our long term assumptions as they are not currently expected to be indicative of future trends or loss performance.

As part of the LTC active life margin testing process, we reviewed our long term assumptions relative to experience. During this year's assessment, we updated several assumptions with respect to lapses mortality expenses interest rates and most significantly benefit utilization trends margin testing results for the LTC block.

Shown on page nine these.

These results remain positive in both the historical and acquired blocks. The combined margin was approximately $500 million to $1 billion, which is consistent with the prior year's range.

As Tom outlined given the expected future increase in the cost of care, we expect a long term benefit utilization to trend higher than previously assumed this is one of our key long term assumptions that impacts trends modeled over 60 year period.

Prior to this update we had assumed that the long term benefit utilization will improve over time.

Based on our experience that has not improved as much as we predicted largely due to the cost of care growth driven both by broad based inflation and minimum wage increases and some large states. Among other factors. Therefore, we've increased the outlook for our future benefit utilization trends.

Since margin testing remained positive we're not required to increase our LTC active life reserves for policies not yet on claim as the model benefit from adjustments to our multiyear rate action plan offsets the approximately $4 billion impact from the assumption updates.

I'm pleased that our progress on our multiyear rate action plan and the other risk mitigation actions combined with future actions have allowed us to absorb these assumption updates without incurring any charges in our financial results.

The year rate action plan is essential to our strategy of proactively managing and mitigating adverse emerging experience and with this updated trend assumption. It further emphasizes the ongoing need for rate actions.

The success of the multi year rate action plan and strengthened our ability to pay claims in two ways.

First there was the increased premium revenue second in connection with approved rate actions and the legal settlements. We've managed our long term exposure to generous product features like lifetime benefits and compound inflation riders as policyholders are elected benefit reductions to mitigate rate increases as evidenced on page 13.

44% of policyholders are selected reduced benefit or non forfeiture options, which reduces our long term risk.

R P claim years or over a decade away and as always we'll continue to monitor emerging experience to help evaluate the need for future changes.

We now project the need in aggregate for approximately $28 7 billion in LTC premium increases and benefit reductions on a net present value basis, which is important in our progress toward achieving economic breakeven on our legacy LTC blocks.

This amount has increased as a result of the assumption update where over two thirds of the way there having achieved $19 6 billion of rate actions since 2012.

The $19 6 billion, we've achieved has grown significantly since last year in part because of the value of our 2021 rate action approvals of $2 3 billion. Additionally, the benefit utilization trend assumption update for higher cost of care growth increase the value of our previously achieve rate actions by $2 8 billion.

The remaining amount we have left to achieve is 9 billion, which has grown from last year largely to offset the unfavorable impact from the assumption updates.

Our proven track record and the strength of the multi year rate action team and their process our ability to close the remaining amount is achievable.

As I've shared before we're managing the U S life insurance companies on a standalone basis through capital and surplus rate increases and reduced benefit options, we're working to ensure our ability to pay LTC benefits over the long term.

Turning to our life insurance products, we reported a fourth quarter adjusted operating loss of $98 million compared to operating losses of $68 million in the prior quarter and $20 million in the prior year.

Overall mortality for the fourth quarter continued to be elevated versus expectations, though improved versus the prior quarter and prior year.

The fourth quarter included approximately 27 million after tax and COVID-19 claims based upon death certificates received state.

As part of our annual assumption review, we made assumption updates from the term universal in Universal life products as well for both mortality and interest rates, which resulted in a combined unfavorable impact of $70 million in the fourth quarter.

In our Universal life products, we recorded a $32 million after tax charge for that comparability testing compared to $30 million in the prior quarter and $50 million in the prior year. These charges continued to reflect unfavorable mortality experience in block runoff.

In fixed annuities adjusted operating earnings of $20 million for the quarter included the benefit from favorable mortality in the single premium immediate annuity products.

And the run off segment, our adjusted operating income was $16 million for the fourth quarter compared to 11 million in the prior quarter and $13 million in the prior year.

Variable annuity performance was driven by equity market performance, which was favorable versus the prior quarter the less favorable than the prior year.

So the U S life insurance company's statutory financials and cash flow testing results remain in process and will be made available with our year end statutory filings.

We expect consolidated capital in Genworth life insurance company or <unk> as a percentage of RBC to be approximately 290% at December 31st in line with the 291% at September 30th.

This is due in part to the expected negative impacts the life assumption updates and cash flow testing.

Offset by the 170 million statutory capital benefit from the Lifelock reinsurance transaction completed in the quarter.

B C is significantly higher than the 229% at December 31, 2020, due primarily to the favorable LTC statutory earnings in the year. This increase was driven by the benefit from in force rate actions, including the impacts from the choice one legal settlement favorable investment performance and favorable terminations.

<unk>.

We expect <unk> consolidated year end capital and surplus to be close to 3 billion as we've seen a strong trend throughout the year.

Pages 15, and 16 highlight recent trends in statutory performance for LTC in blood consolidated on a quarter lag basis due to the timing of when statutory results are finalized.

That story earnings for L. T. C are generally higher than GAAP earnings as the concept of profits followed by losses that I discussed earlier does not exist under statutory accounting.

That story earnings are also aligned to taxable earnings which have resulted in strong cash tax payments to the parent holding company throughout 2021.

Rounding out our results we reported an adjusted operating loss in the corporate and other segment of $18 million, which was an improvement of $31 million from the prior year, reflecting lower interest expense given the reduction in holding company debt as well as lower corporate expenses.

Turning to the holding company, we ended the quarter with $356 million of cash and liquid assets page 17 provides a detailed cash activity for the quarter.

<unk> items in the quarter included the debt reduction of $518 million of principal.

The dividend from an act of $163 million, and 75 billion and the intercompany cash tax payments, reflecting strong underlying taxable income through an act in the U S life insurance business.

The holding company received $370 million in cash taxes in 2021.

We will continue to utilize holding company tax assets in 2022, and anticipate that the holding company will receive approximately $200 million in cash taxes in 2022 subject to ultimate taxable income generated.

Given our current tax position, we do not anticipate paying federal taxes in the near term.

In closing when I think about where we started 2021 I'm incredibly proud of our financial results and the progress we've made against our strategic priorities for the full year of 2021 net income was very strong at $904 million versus $178 million in 2020.

Adjusted operating income was $765 million versus $310 million in 2020.

<unk> contributed $520 million and adjusted operating earnings to Genworth in 2021, and we're very pleased with LTC is $445 million and adjusted operating earnings.

While statutory results are still in progress we estimate full year after tax statutory net income for the U S life insurance business of $660 million driven by L. T. Six estimated 910 billion of pretax statutory income.

2021, we improved our financial strength and flexibility each quarter, putting up strong operating results driving efficiencies to reduce our annual run rate expenses by approximately $75 million maximizing the value of our assets and reducing our debt overall cost of capital with.

With the completion of the enact IPO, we achieve rating upgrades from Moody's and S&P at the parent holding company and recognition of the improved credit risk profile and increase financial flexibility.

<unk> was also upgraded by Moody's S&P, and Fitch, which has enabled it to expand its customer base and be more competitive against peers and.

In 2021, we took a proactive approach to managing our holding company debt, which has strengthened our balance sheet as we head into 2022, we retired over 2 billion in debt, including the Axa promissory note and have approximately $1 2 billion of parent holding company debt remaining as of year end.

We plan to retire the remaining 2024 debt of $282 million ahead of its maturity date.

After we retire the 'twenty 'twenty four debt our next debt maturity will be more than a decade away in 2034, and we would expect cash interest coverage to be approximately five times based on a conservative view of projected cash flows which would be great progress.

While it has been over 13 years since Genworth returned capital to shareholders. We plan on announcing more specific capital management plans later this year given the tremendous improvement in our financial condition achieved in 2021.

Timing is dependent on redeeming the remaining $282 million of debt due in 2024, and then ask announcement of its future dividend policy.

The bottom line is that we've had a terrific year and are entering 2022 with a strong foundation and a clear path for the future.

We look forward to sharing more with you soon.

Now, let's open the line for questions.

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.

Press Star one to ask a question is that anytime you're question has already been answered or if I would like to draw. Your question. Please press star two.

We removed from the queue. Please press star one now.

And we'll go first to Ryan Krueger with K B W.

Hi, good morning.

Give you give.

A little more detail and quantification on what the impact to your long term care reserve margins was from.

I guess the changes excluding the assumption of higher premium rate increases.

I'm just trying to isolate what the assumption changes were prior to today, assuming higher premium increases.

Dan you want to cover that.

Yeah.

Yeah, Thanks, Tom so.

Ryan if you look at.

Nine of the Investor presentation, we provide a little bit more detail there.

What I would say.

Sorry, I had an echo.

What I would say its two things one is the disabled life reserve assumptions overall are holding up.

Sorry about that I had a call coming in at the same time on the active lifestyle.

The biggest impact was the benefit utilization, where we looked at our long term assumptions and we update them to reflect the emerging experience and increased cost of care growth that we've seen.

Both in the overall economy from higher inflation, but also specifically from some of the minimum wage increases that have been pass through at different state levels.

The other assumptions that were material enough to mention here.

Does healthy life mortality.

To reflect emerging experience I should note that we did not include any experienced from the COVID-19 pandemic in our assumptions. These are very long term assumptions and we continue to believe.

That the Covid impacts are temporary.

We also updated interest rate assumptions and despite the fact that rates have increased recently, we do know that overall rates have been coming down.

And then you have to the point that you mentioned, we did offset that with rate increases.

Got it.

Yes.

Separate question is.

Yes, it does.

Like.

Tom You mentioned.

The potential to spinoff enact eventually over time, but it sounds like it.

Tien tsin.

Getting more rate increases in LTC.

You feel like that can stand alone.

How does the I guess the potential to recover some of the act.

Proceeds could come into play I guess it would be you did receive a material amount back from that would that potentially accelerate your ability to spin up an actor that more dependent on.

Long term care rate increases in developing the new business there.

Well Ryan it's a great question.

Obviously.

If there's a settlement.

And recovery on the Axa litigation that would be a significant amount of cash flow.

Which will clearly allow us to accelerate.

<unk>.

Both capital our capital Management program, we could also further reduced that Oh it would help if we have.

Capital investment in new business and clearly it would help us with the spin up the issue is it's pretty clear that the value of the spin off and obviously our shareholders recognize that.

That valued the challenges the remain co and our view is.

We would need remained remain co to be viable and we think to be viable.

As a public company.

It would need to be in good shape on the LTC side at what rate.

But we're making great progress there so I think that will continue.

Very confident in that and that and then these growth strategies.

Hopefully.

They will produce good results.

Rather than later and I think.

If if we're MANCO therefore based on you know.

Not a large gap remaining to breakeven.

So investors can see the growth potential.

That helps.

With the timing of the tax free spin off.

Thanks.

Then just last question on capital return right.

I guess are you contemplating a share repurchase or is it more focused on.

On a potential dividend.

You know Ryan, but we'll evaluate that but I think.

Yeah, if there's downside.

I talked a lot of share of our big shareholders.

Even our retail shareholders.

Some prefer share buybacks some dividends.

I My guess is that.

In the early days tableau has been maybe more share share repurchases than than a regular dividend, but we'll look at all.

Understood. Thanks for the answers.

Thanks, Brian .

Okay.

We'll go next to Joshua <unk> with Creditsights.

Hi, Good morning, I appreciate the time nice quarter today I have a couple of question for a couple of questions for you folks first.

In light thinking about the the term life reinsurance transaction that you executed how else do the legacy fixed annuity or are they variable annuity policies in the runoff segment still fit into the overall scheme.

Obviously theres been a lot of interest from third parties and acquiring a reinsurance and some of these blocks of businesses and I'm wondering if genworth has been exploring options for that for those products potentially.

Potentially for the purposes of a further both bolstering our RBC ratios as well.

Look I think we remain very open to transactions that make sense and add value. So he did the life transaction clearly there are parties as you mentioned Josh.

That have interest in fixed annuities and as those opportunity show show up we fully evaluate them and make a decision based on the pricing and so on whether it makes sense to move forward or not obviously in the case of this life transaction that made sense to move forward with it and it was significant.

Benefits of Stat capital I think Dan said $170 million.

Got it thank you and it kind of as a follow up to that.

Is there anything in particular about the the fixed annuity or the VA block that.

Is generally kind of supportive of the company's overall goals, including a lot of the ones that you had you had mentioned in your prepared remarks with a resuming some kind of LTC whether that's.

Direct insurance or a services business.

Yeah. It's.

Good question, Josh I would say on the variable annuity that's been a run off a long time and it's a relatively small blocks I think around 5 billion and we're open to.

Opportunities there are but but it's relatively small.

Fixed annuity.

And you can see in the quarterly results and our full year results.

<unk> performing very well so it provides a very good statutory and U S GAAP earnings.

On the other hand, if you know we get a very attractive offer value we'd certainly consider.

Selling it or or reassuring.

It goes down to Oh.

And of course like everyone. We get calls all the time on that as it comes down to you know an economic analysis doesn't make more sense to hold it up with the earnings that come with it or is the offer.

The reinsurance or deal.

Strong enough, where it makes sense to do the transaction versus holding it. So so that's the balance.

Yeah.

Understood appreciate that and then separately.

<unk>, obviously done a done a fantastic job of reducing the overall parent company debt burden and I'm just hoping you can maybe help me understand a little bit better how you're thinking about prioritizing.

The remaining debt reduction initiatives that you folks have in mind so.

By way of examples like in the fourth quarter, you took out a portion of the 'twenty 'twenty four is.

You noted earlier that you intend to continue to take out that obligation.

Those are those are trading above par at this point some other securities, namely thinking about the the junior subs out there trading well below par.

Maybe an opportunity to take some of those out at a gain obviously very low coupon there is kind of the offset.

And just just trying to get a sense of your thoughts on that and maybe even further out further.

Further out beyond that where do you feel you stand with regards to maybe you know at some point access to the debt markets to potentially fuel repurchase activity share repurchase activity.

Well, there's a lot there Josh so I would say.

And I'll turn over to Dan and second on the specifics, but at a strategic level I think the first priority would be to.

Redeem the $280 million or 20 floors that are outstanding.

Jude's playing.

Playing when we get there because that would mean the remaining debt is $900 million 30 fours and the 66 is the interest expense is $35 million to $40 million. So we we got our interest coverage ratio when we get the debt there.

A very strong place you know certainly our debt to capital interest coverage would be investment grade and so we're hopeful the rating agencies will see that 66, yeah, they're trading below 100, but.

You know as as most companies when they have these hybrid securities.

And you have senior securities like the 34 is ahead of it we.

We would have before we could repurchase of 66, we'd have to take the 34, south and there are pluses and minuses to that so I think where we are and we'll definitely take the 20 fours out I think this year and then the others are you know.

Well, we'll see I don't think you'll see us issue shares to buy back a I mean, if you I'm sorry issue new debt to buy back shares I do think to the extent that the Axa litigation gets resolved that would give us a significant opportunity to do further capital management, but I don't I don't.

See us we've been I've been here nine years, we've gone from over 4 billion of debt to $901 million and we were very comfortable with that so.

As I said in my remarks, the lowest.

Debt to capital ratio in the industry are among the lowest in the.

With the annual interest so we're really at a place where I have a very strong balance sheet now and so we wouldn't want to jeopardize that.

Also some rate rating agency and debt to capital excuse me is that with the GSA. The gse's have for the for the parent Dan do you want to just give a flavor for it we did do quite a bit of repurchase of the 24th and just how you and your team.

Look at the.

The outstanding balance of trading opportunities that charge.

Yes, thanks, Tom So I'll.

Back into this a little bit.

We ended the year with 350 Sahara in the past.

Which is in excess of the amount we have remaining on the 'twenty 'twenty four is it at $2 80.

Once we pay off the 24 is our thought is that we would want to hold somewhere between let's call. It 100, <unk> hundred 25, maybe as much as $150 million.

Cash.

If you think about that we need a couple more quarters of internal cash generation from cash tax payments and hopefully ultimately a dividend from an act to get to that level. Once we do we'll be in a position to consider paying off early the 'twenty 'twenty four and we'll assess that quarter by quarter as we continue to make progress here.

That we have not thought very significantly about paying down debt beyond that 900 million outstanding.

Simply because shareholders have waited a long time for us to get into a position like this where we generate excess cash and so once we get there we'll evaluate it but right now our priority remains and getting ourselves in a position to pay off those 2024 and hit our target.

Thank you both very much I appreciate all the feedback.

Thank you Josh.

Ladies and gentlemen, we have time for one final question from Ryan Gilbert with BT I G.

Alright, thanks, very much good morning, everyone.

First question's on holding company cash in 'twenty, two and sources abuses it sounds like based on the comments that you just made the retiring the remaining 2020 for us will be a use of cash in 'twenty. Two is any way you can quantify.

On sources and uses for the other line items over the over the year.

I'll, let you handle that one Dan.

Yeah, I I guess I would make a couple of comments.

First of all we've put an estimate out there at about 200 million of cash tax payments coming in.

Just state one thing related to that which is it'll be a little bit front end loaded.

Had a very good year in 2021, and there'll be a little bit of a catch up payment in the first quarter.

So it looks like we're ahead of the plan at that point I would just hold off on.

You know changing those estimates.

What I would say in terms of sources and uses I mean for the most part our expenses our debt service coverage at this point, we've got a little bit of.

The ins and outs beyond that we do fund.

Compensation early in the year and get reimbursed and so there'll be some pluses and minuses as we go through but the vast majority of expenses beyond the debt redemption will be just interest expense.

Okay got it thank you.

And then second question is on I guess, just following up on the dividend versus share repurchase.

Commentary.

And I believe you said last quarter that you expect a significant reduction in book value and I in conjunction with the L. D. T I accounting change does that play into it.

On your consideration on on dividends versus repurchases and basically what I mean as you know if there is a significant reduction in book value. Then you know of repurchase might be less accretive than to book value per share than than what it currently screens at.

Well Ryan.

I would say that.

Yeah.

We're very much looking forward as Dan said, it's been a while since we've been able met on more than a decade return of capital to shareholders. So so we are.

We're very anxious to implement it.

Capital Management program and I think we'll do that this year, our wellbore to say that next quarter and Meg.

You know between between David regular dividends or share buybacks.

Obviously, we will look at that at the time.

E L D G I.

U S GAAP accounting changes, it's going to be interesting because the the biggest change there and you could argue that.

You know the FASB decided what they decided but the biggest impact of L. DTI is the discount rate you you have to use a single corporate rate and that's today and it's higher than it was a quarter ago.

But it's a significant reduction from our earned rate and you know I would argue discounting at the earn rates probably.

More.

I think makes sense I think.

I guess, the FASB decided the single a rated us as more of a current market rates. So you look at the liabilities without discount rate.

I don't think.

It's gonna have a big impact on our capital.

Capital management, how we look at regular dividends versus share buybacks I also think the regulators really don't focus.

At all on U S GAAP.

And I think they they will certainly look at what the implications are of L. DTI, but there their focus will be more on statutory but certainly to the extent that when we get through all that process and we expect that like most of the life industry because it affects all of US will have more to say that on that and the details on mid year.

We certainly will evaluate the pluses and minuses of either.

But I don't I don't see LPTA itself is having a significant impact of what we decided to do some of it will be based on feedback from shareholders.

Sounds of holiday balanced.

Repurchases for dividends, I will say and I talk to shareholders all the investors and shareholders. All the time, there seems to be somewhat of a priority.

For buybacks over a regular dividends, but you know.

We will look at it at the time and I think.

The board and I will spend quite a bit of time in the first quarter.

With outside advisers thinking all through that and we'll have more to say.

On our first quarter call in May.

Okay got it that's very helpful. Last question for me on the just on the the LTC business and.

My wrap on.

You know I appreciate all the commentary this quarter on but I do want to acknowledge that that you know it looks like the deficit between the approval and they needed increases on a cash basis has expanded to over 9 billion from $8 billion last year and you said that you are.

You're confident that you'll be able to close that gap in the coming years and I'm wondering if there's any specifics you can add to what gives you that confidence in the in your ability to close the gap is it is it just you know you're picking up the pace on getting a premium rate increases approved or do you think youre near the tail end of the assumption revisions on any any specifics would be helpful.

Sure.

Yeah, So Ryan great questions in there. It's a complex question, but I will refer you to slide 14, I think slide 14 has a lot of very valuable information and.

If you look at.

The two biggest blocks or choice, one and choice two and together there are about 650000 policies. So that's about 65% and the b.

Average age for choice one rounded to 75 for choice two is 72.

So.

Therefore in where the peak claim years being sort of the mid eighties or call. It 80 to 85 somewhere in there.

And choice one it's five to 10 years before those policyholders really get to their pre claim years. There were some claims. So you can see it again on that page 14 and for choice. Two is it's eight to 13 years. So we're gonna have them several years before we get to those peak claim years of very strong statutory.

Earnings, which will build statutory capital and you know we had a record year this year.

Approved premium increases 403 million, we had never gone over 400 million, but each of the last three if you. If you look at the last three years and go back on approved premium increases there were $3 50 or more each year. If you go back six years ago.

As Louis is significant.

Uh huh.

Increase in the amount of approved increases for the last few years. So I just think what's different today as regulators are.

Uh huh.

Much more comfortable giving premium increases I said, you know Jim all of our land and her team do a great job I think regulators definitely acknowledge.

I acknowledge that we have a very strong projection model.

Yes.

We did it did increase to 9 billion Dan went through the numbers, but what we've gotten 20 billion with $5 1 billion.

In 2021 alone are but those the changes in the assumptions and if youll again on the bottom of page 14, you'll see the average approvals.

Choice one choice to I think twice once on the unlimited.

It's 185 per cent choice. Two is 125 now that's less than what we got on the older blocks. So most of the $9 billion is going to ultimately.

The on the choice, one and choice two and one theres a longer premium runway because the policyholders will be point, we will be paying premiums longer.

And.

We're gonna be getting the premium increases well before.

We get to the peak claim years, so again I feel very comfortable we have significant time.

You know many years to work with regulators to get those premium increases. So that's why we feel very good about where we are given the tremendous progress. The last three years. This year was a record.

I think where we are.

Got off to a pretty good start in 2022, we did a lot of filings for approved increases last year. So I just think if you if you looked at our three year track Records.

It's extremely strong and it's much better than if you looked at the three years before that.

That will continue so we're confident that we're going to close the gap.

Okay. Good to hear I really appreciate it thank you for the time.

Yep. Thank you Ron.

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

Jennifer Thank you very much and thanks to all of you for the call today and for the good questions.

We're incredibly proud as as you heard both Dan and I say of <unk> operating performance and the progress against our five strategic priorities in 2021, and we think it was an exceptional year for the company and a major transformational year.

And I think it bodes very well going forward for shareholder value creation I think our earnings are strong both enact particularly the statutory earnings for the life companies, we expect to continue to be strong.

And I think the board, Dan and I are very.

Please that we think are.

Later this year I got them on board. The same may we'll look to return capital to shareholders.

First time in 13 years, so that's a major strategic priority for us as you can imagine in terms of.

Giving our shareholders investors a sense of the confidence we now have.

And how well we expect to do for the next several years, so with that I want to thank you for your interest support of Genworth and with that I'll turn the call back over to Jennifer.

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

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