Genworth Financial, Inc. (NYSE:GNW) Q2 2023 Earnings Call Transcript

Genworth Financial, Inc. (NYSE:GNW) Q2 2023 Earnings Call Transcript August 9, 2023

Operator: Good morning, ladies and gentlemen and welcome to Genworth Financial’s Second Quarter 2023 Earnings Conference Call. My name is Karen 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: Good morning. Welcome to Genworth’s second quarter 2023 earnings call. A slide presentation that accompanies this call is available on the Investor Relations section of the Genworth’s website, investor.genworth.com. Our earnings release can also be found there and we encourage you to review these materials. Our quarterly financial supplement with updated information for prior periods will be made available at a later date. 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, Brian Haendiges, President of our U.S. 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 SEC rules. Also, references to statutory results are estimates due to the timing of the filing of the statutory statements. And now, I will turn the call over to our President and CEO, Tom McInerney.

Tom McInerney: Thank you, Sarah. Good morning, everyone and thank you for joining our second quarter earnings call. Genworth continued to make progress against our three strategic priorities in the second quarter as we navigated a challenging economic environment. Most notably, I am pleased our Board authorized an additional $350 million in share repurchases, significantly expanding our existing program. Free cash flow to the holding company remains strong driven by Enact’s return of capital and tax payments in 2023 from Enact and the U.S. life insurance companies. We continue to view returns to shareholders as an attractive use of our capital in the current environment and this is reflected in our stock price, which has increased by over 60% as of the market close on Friday, August 4, since announcing our original share repurchase authorization in May of 2022.

We have $86 million remaining on the original share repurchase authority and this new authorization reflects our strong free cash flow and capital structure as well as the Board’s ongoing confidence in our strategy and future. We apologize for the delay in releasing Genworth’s second quarter earnings. Genworth’s adopt the new long-duration target improvements or LDTI GAAP accounting guidance in the first quarter this year for our U.S. life insurance businesses. We have since determined that how we account for the three long-term care insurance, or LTC legal settlements under LDTI should be changed. Genworth is now estimating the cost and expenses associated with these settlements similarly to how we estimate the reserve releases from benefit reductions.

Any differences between actual experience and our best estimate assumptions will be reported in future quarters. As previously disclosed, the legal settlements are expected to have a net favorable impact to Genworth because of the significant reduction in tail risk. The cumulative economic value and total LTC settlement expenses will not change and will be based on policyholder reduced benefit elections over the implementation of the settlements. However, under the change we are making, Genworth will make initial best estimate assumptions for reduced benefits and expenses under the legal settlements. To the extent actual settlement results differ from best estimates, the differences will be recorded in subsequent quarters until the settlement implementations are completed.

For the prior two settlements, Choice I and PCS I and II, we have updated our financial statements using the same methodology. Jerome will cover the accounting treatment of our LTC legal settlements and in-force rate actions in more detail, but it’s important to remember that U.S. GAAP accounting is non-economic and has no impact on cash flows, capital levels, statutory results or how we manage the business. Turning to the second quarter results. Genworth reported net income of $137 million and adjusted operating income of $85 million or $0.18 per diluted share. Enact again had a very strong quarter with net income of $137 million and adjusted operating income of $146 million. Insurance in force at the end of the quarter was $258 billion.

We are pleased with Enact’s continued strong performance. In addition, Enact increased its quarterly dividend payment to $0.16 per share authorized a new share repurchase program of $100 million and increased the total expected capital return in 2023 by $50 million to $300 million. Genworth received $54 million in capital returns from Enact in the second quarter. Since Enact’s IPO, Genworth has received approximately $465 million in capital returns from Enact, enabling us to fund our strategic initiatives, including share repurchases. We expect our 81.6% ownership of Enact to remain the primary source of free cash flow moving forward. Our LTC business reported an adjusted operating loss of $43 million in the second quarter, primarily driven by a liability remeasurement loss of $61 million from higher new claims as the LTC blocks age and seasonally lower claim terminations.

The estimated LTC statutory pre-tax loss was $70 million primarily driven by higher new claims, given the aging of the block and seasonally lower claim terminations, partially offset by a net benefit related to the PCS I and II settlement. Total pre-tax statutory income for the U.S. life insurance companies is estimated to be $63 million in the second quarter. Life insurance pre-tax statutory income is estimated at $26 million, driven by lower mortality and annuities pre-tax statutory income is estimated to be $107 million, primarily driven by variable annuities as a result of favorable equity markets and higher interest rates. Life at annuity statutory income and non-core statutory income in the second quarter more than offset the LTC statutory loss in the quarter.

We have pointed out over the last several quarters that investors should evaluate LTC results under both U.S. GAAP and U.S. statutory accounting to have a more complete understanding of LTC results. As Jerome will explain in more detail, LDTI treats unprofitable cap cohorts differently than profitable uncapped cohorts. LDTI requires us to remeasure LTC liabilities each quarter and compare actual performance against best estimate assumptions. An unprofitable cap LTC cohorts, any liability remeasurement is recorded in the quarter. So, for example, a true-up for actual to expected reserve releases will benefit reduction differences in the settlement impacting these cohorts will impact the P&L that quarter. For profitable uncapped LTC cohorts, our liability remeasurement or other differences from best estimate assumptions primarily impacts the net premium ratio, reducing the quarterly P&L impact compared to the same impact on unprofitable cap cohorts.

Under statutory accounting and similar to pre-LDTI GAAP accounting, all LTC cohorts are treated similarly and results for capped and uncapped cohorts can offset each other during the quarter. Therefore, because of this fair treatment between statutory and GAAP regarding capped and uncapped cohorts, quarterly LTC statutory results should generally be less volatile than U.S. GAAP results under LDTI. As we have said before, the U.S. GAAP results for Genworth’s LTC and life and annuities businesses do not have any impact on free cash flow to the holding company. Free cash flow to the holding company is primarily driven by Enact’s excess cash, and to a lesser extent, by future tax payments from Enact and U.S. alike if the holding company has tax credits available.

Statutory earnings are similar to tax earnings and taxes paid to the holding company can be significantly different than the U.S. GAAP tax rate. Complete statutory results for our U.S. life insurance companies will be available when we file our quarterly statutory statements later this month. Also in the quarter, we received confirmation of trial date and access case against Santander regarding the payment protection insurance and the selling case is set for March 2025. As a reminder to investors, Genworth is not a party to the case, but if AXA is successful in pursuing its claims, we will share in recoveries AXA receives from Santander. We continue to monitor the proceedings closely and we will update investors on any material developments.

Turning to our three strategic priorities. We continue to improve the financial condition of our legacy LTC business, primarily through our multiyear rate action plan or MYRAP, the most effective tool we have to bring our legacy LTC insurance portfolio to economic breakeven on a go-forward basis. We achieved a total of $94 million of gross incremental premium approved in the second quarter building upon $50 million of premium approved in the first quarter. This brings our cumulative progress to approximately $24.4 billion in approvals on a net present value basis since 2012. We are very pleased with our progress in the first half of the year and now expect our total gross and incremental premium improved for the full year to be approximately $275 million this year, up from previous expectations of $250 million.

I also want to mention the report issued by the New York State Department of Financial Services in early June on the long-term care insurance market. The report includes important commentary on the overall state of the LTC industry, acknowledges the need for LTC premium rate action approvals on New York LTC policies, and provides a balanced view of a way forward in sustaining this important insurance market. We appreciate the continued partnership with insurance regulators on efforts to stabilize the LTC industry through premium rate increase approvals and to ensure long-term policyholder commitments are able to be honored. Turning to the next strategic priority, we continue to leverage Genworth’s substantial LTC expertise to develop innovative aging care services and solutions and a new CareScout services business.

We continue to execute on our growth initiatives around CareScout services to meet the large and growing demand for senior care that is not adequately addressed in the market today. We have planned for several phases of new services and products over the next several years. Our first phase includes the build-out of our CareScout quality network of senior care providers with an initial launch in Texas. Texas is a large LTC insurance market and Genworth has approximately 43,000 policyholders there. We are pleased to say that we have CareScout quality network coverage for approximately 50% of the age 65 plus Texas population with providers that have met our quality credentialing standards and agreed to negotiate discounted rates. We are in discussions with dozens of other homecare providers in the state to join the CareScout quality network and have strong momentum to expand the network throughout Texas and nationwide.

Two other large LTC markets, Arizona and Florida are likely to be included in CareScout’s next areas of focus. We are very pleased that each of these providers understand CareScout’s services value proposition around patient-centered quality care and the potential access to Genworth’s 1 million policyholders as well as potential access to other insurers LTC policyholders. At the same time, we made significant progress in developing our new digital technology platform. This platform will facilitate timely matches of Genworth policyholders and new CareScout customers with quality care providers in our network. With the discounted rates negotiated, Genworth policyholders will be able to extend their available benefits and Genworth will realize claims savings over time, driving further risk mitigation for the legacy LTC block.

As we build out our CareScout services business, we will continue to leverage existing relationships with thousands of care providers, experience from processing over 360,000 LTC claims, significant proprietary claim data gathered from LTC policyholders over four decades and the strong team we have to lead these efforts. 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 direct to consumers. Moving on to our third strategic priority. We significantly increased the pace of share repurchases in the second quarter. We repurchased $112 million worth of shares at an average price of $5.45 per share and repurchased another $20 million in the month of July.

This brings the cumulative total to approximately $264 million worth of shares repurchased since the program’s inception in May 2022. Including the expansion of the program we announced on July 31, we now have approximately $436 million of outstanding repurchase authority. We continue to allocate excess cash from Enact to drive Genworth’s long-term shareholder value. Cash flows from Enact have fueled our share repurchase program and enabled us to invest in our long-term growth strategy in CareScout. When we think about capital allocation, it is important to remember our commitment to managing the U.S. life insurance companies on a standalone basis. They operate as a closed system, leveraging existing reserves and capital, earned premiums as well as future new premiums under the LTC multiyear rate action plan to cover liabilities.

We have no plans to put additional capital into the U.S. life insurance companies. And given the long tail of our long-term care insurance policies with peak claim years still over a decade away, we also do not expect to extract capital from the U.S. life companies. While we believe there is tremendous value in the intellectual property, data and experience we’ve amassed from the LTC business, our view of Genworth’s enterprise value and future potential are rooted in our 81.6% ownership stake in Enact and our plans to develop CareScout into a comprehensive set of products and services to address the complex challenges of aging and senior care. In closing, I am very pleased with Enact’s performance and our strong execution against our three strategic priorities during the first half of the year.

We are working from a significantly improved financial foundation with a high-quality holding company balance sheet and strong free cash flow, primarily from Enact. With that, I’ll turn the call over to Jerome.

Jerome Upton: Thank you, Tom, and good morning, everyone. Today, I will highlight our financial performance and key drivers by segment as well as provide an update on our strong liquidity and capital positions. We are pleased with the progress on our multiyear rate action plan, strong cash position at the holding company and the value generated for shareholders through our share buyback program. For the quarter, we reported $137 million of net income or $0.29 per diluted share and $85 million of adjusted operating income or $0.18 per diluted share. Results were driven by Enact’s very strong performance of $146 million in adjusted operating income to Genworth driven by favorable loss performance. While our GAAP results were impacted by LTC losses, it is important to note that LTC’s GAAP performance does not alter Genworth’s economics or cash flows.

We view the U.S. life insurance companies as having no impact on our enterprise value, and we expect shareholder value to continue to be driven by Enact’s strong performance and our investments in future growth through CareScout. Before I review results, I would like to supplement Tom’s comments regarding the change we have made to our accounting related to the unique LTC legal settlements. Under LDTI, there is no specific guidance for these unusual legal settlements or how to treat cash payments to policyholders in connection with these legal settlements, known as settlement payments. The accounting change we made for GAAP does not alter the favorable economics of our legal settlements to LTC, it simply impacts the timing and classification of our recognition of the settlement payments.

We made this change to align estimates of settlement payments to policyholders with the related estimates of policyholder benefit reductions to ensure that both are recorded in the same financial reporting period. Prior periods for LTC GAAP results have been adjusted for this change. There are no changes to statutory accounting for these settlements. Now turning to Enact’s results on Slide 6. Primary insurance in-force increased 9% year-over-year to $258 billion, driven by new insurance written and continued elevated persistency. Enact is well positioned to continue to drive growth with a well-performing portfolio and strong capital position and will continue to create long-term shareholder value. Slide 7, shows Enact had a favorable $63 million reserve release which drove a loss ratio of negative 2%.

The reserve release primarily reflects favorable cures on 2020 through first half 2022 delinquencies, including COVID-19-related delinquencies. Both Enact’s prior quarter and prior year results included favorable reserve releases as well, $70 million and $96 million, respectively, Primarily from cures on COVID-19 delinquencies. Enact’s estimated PMIER sufficiency ratio remains strong at 162% or approximately $2 billion above PMIERs requirements. As a result of its continued strong performance and confidence in its outlook, Enact increased its quarterly dividend payment last quarter from $0.14 to $0.16 per share, which generated proceeds of $21 million to Genworth in June. Enact now expects to return $300 million of capital to its shareholders this year and authorized a new share repurchase program of $100 million.

Based on our 81.6% ownership of Enact, we anticipate receiving approximately $245 million for the full year through a combination of its quarterly dividends, share repurchase program and a special dividend. Year-to-date, through the end of July, we have received $96 million in capital returns from Enact. Going forward, returns of capital from Enact will continue to enable Genworth to generate excess cash flow for capital deployment. Turning to long-term care insurance. Slide 8, highlights our strategic focus for LTC and the progress on our multiyear rate action plan to protect our claims paying ability and build resiliency for the U.S. life insurance companies to be managed on a stand-alone basis. We have a very successful track record of working with state insurance regulators to achieve premium rate increases as demonstrated over the last 11 years.

Through the second quarter, we have achieved in-force rate actions of $24.4 billion on a net present value basis since 2012. We feel confident in our continued ability to execute on the multiyear rate action plan and favorable reduced benefit impacts from recent legal settlements have accelerated this progress and further reduced the tail risk on the block. To date, we’ve seen a policyholder response rate of 47.5% to reduce benefits, which significantly reduces risk on these policies as the block ages and new claim counts continue to increase. Long-term care insurance GAAP results are covered on Slides 5, 9 and 10. As we mentioned, we are focused on cash flows in achieving economic breakeven for LTC. Under LDTI accounting, we expect ongoing volatility in our LTC quarterly GAAP results as we remeasure our actual experience versus our best estimate assumptions which are now recorded at a granular policy cohort level.

However, these results do not impact our cash flows, economic value or change how we’re managing the business. As shown on Slide 5, our LTC segment reported an adjusted operating loss of $43 million for the second quarter compared to adjusted operating income of $23 million in the prior quarter and adjusted operating income of $17 million in the prior year. Turning to Slide 9. The second quarter loss was primarily due to a liability remeasurement loss of $61 million, principally on our unprofitable or cap cohorts. The liability remeasurement loss was driven by an $85 million difference in our actual to expected experience from lower terminations and higher claims partially offset by a favorable $24 million cash flow assumption update related to the timing and amount of anticipated in-force rate actions.

Referring to Slides 9 and 10, the LTC liability remeasurement under GAAP accounting is relative to our $41.6 billion liability for future policy benefits. Quarterly actual to expected variations on such a large reserve balance and appear to have a significant impact, but do not change cash flows, the long-term economics or reserve adequacy of the LTC business. Going forward, quarterly volatility on the GAAP income statement will be driven by two primary factors. First, as noted on Slide 10, under LDTI accounting, we are now required to remeasure the liability at a more granular cohort level based on policy issue year. Amongst the policy year cohorts, our LTC book is generally split evenly between cap cohorts, which are unprofitable blocks and have a net premium ratio capped at 100% and uncapped cohorts, which are the profitable blocks with positive margins and net premium ratios below 100%.

The policyholders and the profitable uncapped cohorts are generally younger, still over a decade or more away from their peak claim years, and we have more premium runway on those policies with our multiyear rate action plan. In contrast, the cap cohorts are our older unprofitable blocks with higher claims and much shorter premium runways. Prior to the implementation of LDTI accounting, we did not have this cohorting concept. We would review the block in total, so profitable and unprofitable policies were considered together, resulting in positive margin in the aggregate. Now, however, under LDTI, because the cap policy cohorts have no margin, the actual to expected experience will be recognized immediately and hit the bottom line. While the profitable uncapped cohorts have margin, their earnings impact, when we evaluate actions to expected experience will be more modest because their margin absorbs experience variations with a recalculation of the net premium ratio.

For us, this new LDTI cohorting requirement is a significant change in the accounting, given the dynamics of our legacy LTC block. The second reason we expect increased volatility in our LTC GAAP results going forward is from the disparate impact of in-force rate actions and legal settlements on the different cohorts under LDTI accounting. Reserves are under best estimate assumptions, updated leased annually in the fourth quarter and now include an estimate for benefit reductions from in-force rate actions and settlements, including an estimate for settlement payments. The reserve releases from policyholder reduced benefit elections and settlement payments will impact the income statement on a quarterly basis to the extent that actual experience differs from assumptions and it will be more pronounced for our unprofitable capped cohorts.

Previously, under old GAAP reserve releases and settlement payments were recorded to the income statement as policyholders made reduced benefit elections similar to statutory. This is a fundamental change between old GAAP accounting and new LDTI cap accounting. While the reserving methodology has changed, there was no change to how the company accounts for premiums related to in-force rate actions. When looking at the impacts from in-force rate actions on a GAAP basis, an investor will not get the full picture of the favorable economics of the in-force rate actions and settlements because the benefit reductions are included in best estimate assumptions. In the fourth quarter of 2022, there was a material liability remeasurement gain for LTC, which reflected a favorable cash flow assumption update of approximately $300 million largely from an update to our best estimate reserve assumptions for the inclusion of our second legal settlement, which impacted our PCS I and II policies.

The approximate $300 million gain is now inclusive of our estimate for PCS I and II settlement payments of approximately $200 million based on the accounting change we highlighted, whereas previously, the settlement payments were recorded over time as incurred. As we’ve discussed, the PCS I and II settlement represents approximately 15% of the overall LTC block and impacts older, unprofitable, principally cap cohorts, which is one of the expected net reserve reduction impacted the liability remeasurement line and the income statement. As we look ahead, we will be updating our best estimate assumptions later this year for the third legal settlement on our Choice II policies. Choice II is one of our newer blocks with policies written between 2003 and 2011.

It accounts for over 35% of our total LTC policies and approximately 90% of the block currently contains profitable uncapped cohorts with margin. The LDTI accounting impact for the Choice II settlement will be very different than the impact we saw for the PCS I and II settlements because the Choice II block is mostly uncapped while PCS I and II blocks were predominantly capped. Therefore, while we expect the Choice II settlement to result in a significant reduction in Genworth’s LTC tail risk and to be a net positive for Genworth over the long-term. We expect a very small income statement impact when we update our GAAP assumptions for the Choice II settlement. The benefit to Genworth will depend on the rate at which policyholders elect to reduce benefits.

And since these cohorts are mostly uncapped the majority of the impact will be realized over the lifetime of the cohorts. For these reasons, we encourage investors to review our statutory results, which we believe better represent the underlying performance of the U.S. life insurance companies and particularly LTC. As shown on Slide 11, LTC statutory pretax earnings of $67 million for the first half of the year are down significantly from the $265 million in the first half of 2022, driven by a second quarter estimated loss of $71 million from seasonally lower terminations and higher claims partially offset by continued favorable premium increases and benefit reductions from in-force rate actions, including from the PCS I and II legal settlement.

Statutory results provide more visibility into the positive economic impact the in-force rate actions and legal settlements have on our business. As a reminder, we had a number of favorable impacts in the prior quarter and prior year that did not reoccur at the same level. Last quarter, we saw seasonally high LTC claim terminations and second quarter terminations were lower as expected, in line with pre-pandemic seasonal trends. In the second quarter of 2022, we had higher terminations, likely some continued impacts from COVID and higher variable investment income. As the implementation of Choice II legal settlement ramps up in the second half of the year, we expect it to have positive impacts on our LTC statutory results. Slide 12, illustrates the trend we’ve been seeing that paid claims continue to increase as the blocks age and will continue to do so as peak claim years on our largest Choice II block are over a decade away.

The average age on our Choice II block is 73 as shown on Slide 21. Peak claims years occur when attained age is in the mid-80s. The average attained age for the two smallest and oldest blocks, pre-PCS and PCS I are 89 and 87, respectively. Claims on those blocks will decrease but will be more than offset by increasing claims on our Choice I and Choice II blocks, which represent 58% of total LTC in-force lives. We saw reduced claims growth in 2020 through 2022 driven by the COVID-19 pandemic as terminations were high for both healthy and disabled life and people appear to have delayed seeking care and going on claim. We will continue to monitor new claims growth and we have considered this trend and our plans to bring the LTC block to breakeven.

To that end, we made further progress on our multiyear rate action plan this quarter achieving $94 million of gross premium approvals as shown on Slide 13. As I mentioned, our cumulative net present value of achieved in-force rate actions is now $24.4 billion, up $600 million from $23.8 billion at the end of the first quarter of 2023. In addition to the multiyear rate action plan the LTC legal settlements have been greatly beneficial to both Genworth and our policyholders. For policyholders, many have elected to reduce their benefits while maintaining meaningful coverage, and in turn, reduce or eliminate their premiums. For Genworth benefit reductions allow us to release reserves and reduce our tail risk on these policies. Slide 14, shows the increase year-over-year we have seen in policyholder benefit reductions.

Turning to Slide 15, our Life and Annuities segment reported adjusted operating income of $2 million driven by an adjusted operating loss in life insurance of $17 million, offset by adjusted operating income from fixed annuities of $10 million and $9 million from variable annuities. Life and annuities were also impacted by the seasonally low mortality this quarter. In life insurance, mortality was improved versus the prior quarter and prior year and results reflected lower DAC amortization expense due to lower lapses and block runoff. Fixed annuities results were down versus the prior quarter and prior year from unfavorable fixed payout annuity mortality and lower net spreads. Variable annuities were flat versus the prior quarter and up versus the prior year from favorable impacts from the aging of the block, partially offset by lower fee income.

As shown on Slide 16, we are estimating second quarter pretax statutory income for our U.S. life insurance companies in total to be $63 million, results were driven by strong variable annuity performance from net favorable equity markets and interest rate impacts and by life insurance earnings from seasonally low mortality which were partially offset by the LTC pretax loss of $71 million that I previously mentioned. The consolidated risk-based capital ratio for Genworth Life Insurance Company, or GLIC, is estimated at 293% at the end of June, down slightly from 295% in the first quarter as a result of higher required capital as the LTC block ages. Our final statutory results will be available on our investor website with our second quarter filings later this month.

We will continue to manage our U.S. life insurance companies on a standalone basis. Our focus is on stabilizing the legacy LTC block through our multiyear rate action plan as it is our most effective tool for managing LTC’s risk. We do not expect to receive dividends from the business or to contribute capital into it. Therefore, we think it would be reasonable for investors valuing Genworth as a whole, to ascribe no value to the U.S. life insurance companies other than the intellectual property we are leveraging for our CareScout initiatives. We see tremendous value in Enact as evidenced by their strong capital returns and in our ability to grow CareScout over time. Rounding out GAAP results for the quarter. Corporate and others current quarter adjusted operating loss of $20 million was higher compared to the prior year, driven by investment in future growth of CareScout.

Moving to our investment portfolio, we remain well positioned to manage through ongoing economic uncertainty. We have not seen any notable deterioration in the macro environment since our last quarterly update. However, given the heightened focus on investment holdings, especially in commercial real estate, we continue to disclose our portfolio positions on Slide 17 and 18 in our investor presentation. With the regional bank pressures, we have rebalanced and optimized our holdings to exit higher-risk regional banks and trim our overall exposure. We said last quarter that we had sold our position in First Republic Bank and the corresponding $9 million pretax loss is reflected in our net investment gain number this quarter. The portfolio continues to benefit from the high interest rate environment, which allows us to invest at attractive new money rates.

As a reminder, the majority of our assets are an investment-grade fixed maturities that are listed as available for sale, but we generally buy and hold the bonds to support the U.S. life insurance companies liabilities. Because the liabilities are very long duration, especially for LTC, we have limited liquidity risk. As seen on Slide 18, our commercial real estate holdings continue to account for approximately 16% of our total portfolio and are concentrated in higher quality investment-grade assets with modest office exposure of less than 20% on a weighted average basis. Broad credit performance has been stable across the quarter, and we remain confident in the quality of our commercial real estate portfolio and that it’s well positioned amidst volatility.

Turning to the holding company on Slide 19, after repurchasing $112 million worth of shares in the quarter, we ended the period with $222 million of cash and liquid assets. After reaching our holding company target last September, we strive to maintain a debt-to-capital ratio of 25% or below, which attributes no equity value to the U.S. life insurance companies. As of the second quarter, our debt-to-capital ratio was 23%, which we view as optimal given our low debt service relative to our size. We received $54 million of capital from Enact and $63 million from intercompany tax payments in the quarter. Year-to-date, we have received $111 million in tax payments. And for the full year, we continue to expect a total of approximately $175 million to $200 million.

There is approximately $75 million of remaining holding company deferred tax assets, mainly foreign tax credits that we expect to utilize this year dependent on the taxable income generated by our subsidiaries. Once these tax assets were exhausted, we anticipate becoming a Federal taxpayer. Tom described our capital allocation strategy, and I will reiterate that our top priorities remain investing in long-term growth through CareScout and returning cash to shareholders through our expanded share repurchase program. We are very pleased the Board authorized the expansion of our share repurchase program by $350 million. Through July, we completed 75% of the initial $350 million program that began in May 2022, and we expect to complete the remaining amount by the end of this year.

The program’s expansion allows us to continue to return capital to shareholders as we head into 2024. Through the first half of this year, we delivered on our strategic priorities to drive value for our shareholders while proactively managing our liabilities and the risk in our legacy long-term care insurance block. The multiyear rate action plan continues to be successful and with the additional benefit from the three legal settlements, it enhances our ability to honor policyholder commitments and stabilize the legacy LTC block. I am excited about the future of Genworth as we utilize our deep knowledge in the senior care space to innovate new aging care services and solutions with CareScout. Enact remains very well positioned in the mortgage insurance market and their business performance and increased capital return guidance will enable us to continue to return capital to Genworth shareholders.

Now, let’s open up the line for questions.

Q&A Session

Operator: [Operator Instructions] We will take our first question from Joshua Esterov with CreditSights. Please go ahead.

Joshua Esterov: Hey. Good morning. Thank you for your time. Maybe two questions, if I can, on LDTI and LTC. First, with regards to the intercompany tax-sharing payments, can you remind me whether Genworth’s parents’ ability to build its subsidiaries based on GAAP or statutory profitability? And basically, what I am trying to get a sense of is whether or not the quarterly volatility in GAAP LTC earnings from implementation of LDTI might impact these intercompany tax payments?

Tom McInerney: So, I will walk into – Jerome, I will take the first part of that and just say that it’s a good question. Our statutory results are much closer to tax results and therefore, looking at the ability to utilize those remaining tax credits, it’s more driven by – it’s taxable earnings, but it’s closer to statutory where GAAP is going to be quite different.

Joshua Esterov: Got it. Thank you. And then second, with regards to LTC, how should we expect GAAP reserves to develop relative to statutory reserves under the LDTI regime? And I understand that LDTI doesn’t impact the statutory financials. But over time, should we expect GAAP reserves potentially to drift away from statutory reserves unless there is some kind of unlocking event?

Tom McInerney: So, Jerome, and do you want to take that?

Jerome Upton: Yes, Josh, I would just describe this as LDTI is totally different basis of accounting. So, GAAP is a totally different basis of accounting from stat and the reserves under U.S. GAAP are going to be on a best estimate basis, are going to be discounted at a locked-in rate and then further discounted and this is only – this only impacts the balance sheet, but they are further discounted based on the single A rate, and that really just impacts reserves on the balance sheet when you go to the single A rate. But you also have the locked-in rate. On the statutory side, you have a very prescriptive methodology that we use, particularly on the active life reserve. And so it would be very difficult for me to tell you that they are going to combine or go together versus drift apart.

If I had to, I would just say that there will be demonstrative differences between the two, it would be very difficult to quantify for you. And you know from an LDTI perspective, I would just also highlight that I mean we have said that we really focus on statutory accounting. The LDTI income will be volatile because half of our block has cap cohorts, thus versus the other half with uncapped cohorts. And statutory accounting is really our focus because – it’s what we review with our regulators. It’s what we review with our rating agencies. And it’s been a consistent basis of accounting that highlights the progress we are making with the company on breakeven.

Joshua Esterov: Thank you very much. Appreciate everyone’s time and color.

Tom McInerney: Thanks for your questions, Josh.

Operator: [Operator Instructions] Ladies and gentlemen, I will now turn the call back over to Mr. McInerney for closing comments.

Tom McInerney: Thank you very much. In closing, I would just say that – as both Jerome and I have talked about, we believe it’s important for investors and analysts to evaluate LTC and life annuities under both U.S. GAAP and statutory accounting. U.S. GAAP results will generally be more volatile, as we have said, than statutory because of the disparate treatment of the different LTC cohorts that are roughly 50-50 between the older capped unprofitable and relatively newer uncapped and profitable blocks. But we also want to emphasize that because we look at USLI or the life companies as a closed system, they have little impact on holding company cash and capital other than the tax payments, assuming that we have tax credits to offset that.

We value and have valued and have said to investors for a long time that we value the life company at zero at this point because we are not putting capital in or taking it out. And I was – the main effort is the focus on the multiyear rate action plan and to get the LTC business to breakeven. And we think that’s a few years out. And our focus is – the enterprise value is really more based on our 81.6% holdings in that. And we are very encouraged by the early days in CareScout. We talked about – Jerome talked about the great progress in Texas. We launched that earlier this year, and we have got about 50% of the stake covered in terms of – by our approved quality network covering about 50% of the 65-plus group. We are proud of the progress against our three strategic priorities, and I went through those – and obviously, we are very pleased with Enact’s continued strong results.

We continue to allocate the excess cash from Enact which had another great quarter to drive long-term shareholder value, both investing in CareScout going forward as well as returning capital to shareholders through the share repurchase program that we are pleased that the Board authorized, significant increase of another $350 million. Thank you all for your interest and support of Genworth. We really appreciate it. We will see you next quarter. And with that, operator, I will turn it back over to you.

Operator: Ladies and gentlemen, this concludes Genworth Financial’s second quarter conference call. Thank you for your participation. At this time, the call will end.