Genworth Financial, Inc. (NYSE:GNW) Q1 2024 Earnings Call Transcript

Genworth Financial, Inc. (NYSE:GNW) Q1 2024 Earnings Call Transcript May 2, 2024

Genworth Financial, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen, and welcome to Genworth Financial’s First Quarter 2024 Earnings Conference Call. My name is Cynthia, and I will be your coordinator today. [Operator Instructions]. I would now like to turn the presentation over to Sarah Crews, Director of Investor Relations. Please go ahead.

Sarah Crews: Thank you, and good morning. Welcome to Genworth’s first-quarter 2024 earnings call. The slide presentation that accompanies this call is available on the Investor Relations section of the Genworth website, investor.genworth.com. Our earnings release and financial supplement can also be found there, and we encourage you to review these materials. Speaking today will be Tom McInerney, President and Chief Executive Officer; and Jerome Upton, Chief Financial Officer. Following our prepared remarks, we will open the call up for a question-and-answer period. In addition to our speakers, Jamala Arland, President and CEO of our US Life Insurance business; and Kelly Saltzgaber, Chief Investment Officer, will also be available to take your questions.

During the call this morning, we may make various forward-looking statements. Our actual results may differ materially from such statements. We advise you to read the cautionary notes regarding forward-looking statements in our earnings release and related presentation, as well as the risk factors of our most recent annual report on Form 10-K as filed with the SEC. This morning’s discussion also includes non-GAAP financial measures that we believe may be meaningful to investors. In our investor materials, non-GAAP measures have been reconciled to GAAP where required in accordance with the SEC rules — also, references to statutory results or estimates due to the timing of the filing of the statutory statements. And now, I’ll turn the call over to our President and CEO, Tom McInerney.

Thomas McInerney: Thank you very much, Sarah. And good morning, everyone, and thank you for joining our first-quarter earnings call. Genworth continued to make strong progress in the first quarter against our strategic priorities to drive long-term growth and shareholder value. In the first quarter, Genworth reported net income of $139 million, or $0.31 per share, and adjusted operating income of $85 million, or $0.19 per share. Results were led again by Enact, which had a very strong quarter with adjusted operating income of $135 million to Genworth. Enact also announced a $250 million expansion of its share repurchase program and an increase in its ordinary dividend to $0.185 per share, up from $0.16 per share. We are very pleased with Enact’s continued strong operating performance, capital levels, and shareholder distributions.

Since Enact’s IPO, Genworth has received approximately $675 million in capital from Enact, including $61 million in the first quarter. We are very pleased with our approximately 81% ownership stake in Enact, as it continues to generate significant earnings and is a key source of cash flows, helping fuel our share repurchase program, opportunistic debt reduction, and our growth investments in CareScout. Our LTC segment reported adjusted operating income of $3 million in the quarter, driven by seasonally higher claim terminations. Meanwhile, our life and annuities segment reported an adjusted operating loss of $15 million, driven by losses in life insurance. Jerome will cover the performance of these segments in more detail later. On a statutory accounting basis, the US life insurance companies had a very strong quarter, with pre-tax income estimated at $258 million, driven primarily by benefits from LTC in-force rate actions, including the impact of legal settlements.

See also 20 Biggest Oil Producing Countries in Asia and 20 Countries That Produce the Most Gold in the World.

Q&A Session

Complete statutory results for our US life insurance companies will be available when we file our first-quarter statutory statements later this month. Turning to our three strategic priorities, we continue to further strengthen the financial and operating capabilities of our legacy LTC insurance business. We’re achieving this primarily through our multi-year rate action plan, or MYRAP, the most effective tool we have to bring our legacy LTC insurance portfolio to break even on a go-forward basis and ensure the continued sale sustainability of the life insurance companies. We achieved a total of $41 million of gross incremental premium approvals through March, with an average percentage premium increase of 25%. This brings our cumulative progress to approximately $28 billion in approvals on a net present value basis since 2012.

Our second strategic priority is to develop innovative aging services and solutions through CareScout. On this front, CareScout Services is well positioned to drive future growth for Genworth as we continue to make significant progress on the first phase of our offering with the buildout of our CareScout Quality Network, a network of long-term care providers. The CareScout Quality Network is now available in over 30 states with more than 200 providers in the network. We continue to add providers to the network that meet our quality credentialing standards and agree to negotiated preferred rates. By the end of the year, we anticipate that we will have CareScout Quality Network home care coverage for two-thirds or more of the age 65-plus census population in the US.

The CareScout Services business model is predicated on earning revenues generated from discounts on LTC claim savings, with an initial focus on reducing claim costs on Genworth LTC policyholders’ claims. Historically, Genworth policyholders have chosen their care providers with little input from Genworth, and more than a third have chosen providers that charge hourly rates above the median cost of care in their respective zip codes. Two key benefits of the CareScout Quality Network are the higher quality of care and the lower hourly rates negotiated with the subset of providers that are admitted to the network. Providers are willing to accept lower hourly rates in exchange for potential access to Genworth’s 1 million LTC policyholders. Currently, 85% to 90% of the providers approved for our network have agreed to hourly rates below the median cost of care for their respective zip codes.

While Genworth policyholders can choose the care provider outside of the CareScout Quality Network, we assume many will choose providers in the network because they will allow their policy benefits to potentially last longer while receiving care from high-quality person-centered care providers. Genworth Life Insurance Company and CareScout Services have negotiated an arm’s-length agreement that is triggered when a Genworth policyholder chooses a CareScout Quality Network provider. Genworth, of course, benefits from 100% of the applicable cost discount negotiated with the provider. The life insurance company retains 75% of the value of the discount through lower claim costs, which we continue to forecast between $1 billion to $1.5 billion in savings over time on a net present value basis.

The remaining 25% of the value of the discount is paid as a fee to CareScout Services for the use of their network. As the number of matches between individuals on claim and CareScout Quality Network providers grows, CareScout Services revenues will increase. With the network in place across the country by the end of the year, we expect CareScout revenues to grow as matches increase in 2025. Over time, with national coverage in the CareScout Quality Network, we will expand our customer base beyond Genworth policyholders to include other LTC insurance carriers’ policyholders and then eventually go directly to consumers. As we have said before, we believe a holistic approach to making aging more dignified, connected, and fulfilling includes offering insurance and other funding solutions to help pay for long-term care.

We continue to build the foundation for these offerings in CareScout and now expect to complete this foundational work by the end of the year, with a goal of formally offering a first insurance product in early 2025. As we work through designing and pricing our new LTC insurance products and its related assumptions, we are leveraging our unparalleled experience in paying over 370,000 LTC claims. When I look at the LTC insurance products currently available in the market, I believe that the price points for many of these products reflect pricing assumptions that are aggressive. Moving to our third strategic priority, capital management, we continue to allocate excess cash from Enact to drive Genworth’s long-term shareholder value. In the first quarter, we made excellent progress continuing to execute our share repurchase program.

In total, we have repurchased approximately $434 million of shares at an average price of $5.42 per share since the program’s inception in May 2022. Cash flows from Enact have also enabled us to invest in long-term growth, and we continue to expect approximately $35 million of capital contributions to CareScout Services this year as we build out the CareScout Quality Network. We will continue to prudently scale and diversify CareScout Services in a way that will leverage our intellectual property, successfully drive claims savings in our legacy LTC block, introduce new offerings to the market, and drive long-term growth. Before I wrap up, I wanted to take a moment to remind investors that the trial date in AXA’s case against Santander regarding the payment protection insurance misselling case is still set for March of next year.

As we have said before, Genworth is not a party to the case, but we previously owned the payment protection insurance business before selling it to AXA in 2015. If AXA is successful in pursuing those claims, we will share in the recoveries AXA receives from Santander. We continue to monitor the proceedings closely, and we’ll update investors with any material developments. In closing, I’m very pleased with our continued progress against our strategic priorities year to date, along with Enact’s strong performance. And with that, I’ll turn the call over to Jerome.

Jerome Upton: Thank you, Tom, and good morning, everyone. I’m very pleased with the ongoing value creation delivered by Enact and progress on our LTC in-force rate actions, as well as our capital optimization and continued improvement in financial flexibility. I’ll first discuss Genworth’s results and drivers in more detail, then I’ll provide an update on our investment portfolio and liquidity before we open the call for Q&A. First, slide 5, and as Tom mentioned, first-quarter adjusted operating income was $85 million, driven primarily by Enact. Our long-term care insurance segment reported adjusted operating income of $3 million, including a liability remeasurement gain from actual to expected experience, primarily driven by seasonally high mortality.

Looking ahead, despite the favorable seasonal impact in the first quarter due to short-term deviations of actual results compared to long-term assumptions, we continue to expect LTC earnings pressure throughout the remainder of the year and expect a liability remeasurement loss from actual to expected experience for the full year on a GAAP basis. As a reminder, last year, we recorded a full-year pre-tax actual to expected loss of $269 million, with a quarterly average loss of about $65 million, after experiencing positive first-quarter results. And as we have said before, GAAP results continue to be volatile. We believe statutory results better represent the underlying performance of the life companies, including the positive impacts resulting from our in-force rate actions.