Good morning, ladies and gentlemen, and welcome to Genworth Financial's Third Quarter 2021 Earnings Conference Call. My name is Katie, 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 the conference call. As a reminder, the conference is being recorded for replay purposes. [Operator Instructions] I would now like to turn the presentation over to Tim Owens, Vice President of Investor Relations. Mr. Owens, you may proceed.

Thank you, operator. Good morning, and thank you for joining Genworth's third quarter 2021 earnings call. All of our speakers are remote this morning, so please excuse any sound quality or technical issues that may arise. A press release and financial supplement were released last night, and this morning, our earnings presentation was posted to our website and will be referenced during our call. We encourage you to review all of these materials. Today, you will hear from our President and Chief Executive Officer, Tom McInerney; followed by Dan Sheehan, our Chief Financial Officer and Chief Investment Officer. Following our prepared comments, we will open up the call for a question-and-answer period. In addition to our speakers, Brian Haendiges, President of our U.S. Life division, and Jerome Upton, Deputy Chief Financial 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 financial supplement, earnings release and investor materials, non-GAAP measures have been reconciled to GAAP where required in accordance with SEC rules. Also, references to statuary results are estimates due to the timing of the filing of the statutory statements. And now, I’ll turn the call over to our President and CEO, Tom McInerney.

Thank you, Tim. Good morning, everyone. And thank you for joining Genworth’s third quarter earnings call. We're pleased to report another very strong quarter of operating performance, continuing the race momentum in our businesses. Net income in the third quarter was $314 million. Adjusted operating income totaled $239 million, up from $125 million in the year ago period, driven primarily by the U.S. Life Insurance business. U.S. Life reported adjusted operating income of $93 million for the quarter, up from $71 million in the prior quarter, and $14 million in the prior year period. Results were primarily driven by LTC insurance, which reported adjusted operating income of $133 million, reflecting strong earnings from in force rate actions, including higher benefit reductions, as well as higher net investment income. Our U.S. mortgage insurance subsidiary Enact held its first quarterly earnings call as a publicly traded company this morning, following a successful IPO in September. Its results included very strong adjusted operating income, substantial growth in primary insurance in force, and robust capital sufficiency. Dan will provide more details around Enact’s performance and its impact on Genworth’s consolidated results. We also encourage shareholders to refer to Enact’s earnings release and slides posted on its Investor Relations website for more details. We once again ended the quarter with improved capital sufficiency in both Enact and our principal life insurance company, Genworth Life Insurance Company, or GLIC. We entered the fourth quarter with a strong cash position of approximately $638 million, and exciting plans to further strengthen Genworth’s balance sheet, and advance our long-term growth agenda. Looking forward, we remain focused on five strategic priorities, which we're working on in parallel. As a reminder, our priorities are to maximize the value of Enact, reduce our holding company debt, achieve economic breakeven and stabilize the…

Thanks, Tom, and good morning, everyone. This was another excellent quarter for Genworth, a strong financial performance and continued advancement toward our strategic priorities. Net income this quarter was $314 million. And with this quarter’s $239 million adjusted operating income of $0.46 a share, we've reported more than $600 million in adjusted operating income so far this year. During the quarter, we fully retired the remaining principal amount of the September 2021 debt maturity of $513 million. We also successfully executed Enact’s IPO, generating $529 million in net proceeds that we use to pay off the remainder of our AXA promissory note of $296 million, and further enhance our liquidity position, moving forward with a strong cash position and a clear path for continued execution of Genworth’s strategy. Our Enact subsidiary hosted their earnings call this morning, so I'll focus on the key highlights. Enact’s NIW for the quarter was $24 billion, and contributed its overall 10% year-over-year increase in insurance in force. For the third quarter, Enact reported adjusted operating income of $134 million to Genworth, and a strong loss ratio of 14%. I would note the Genworth’s third quarter adjusted operating income excludes an 18.4% minority interest since the Enact IPO date of September 16 were $4 million in adjusted operating income for the third quarter. Enact finished the quarter with an estimated PMIERs sufficiency ratio of 181%, approximately $2.3 billion above published requirements. The improvement in the PMIER sufficiency versus the prior quarter was driven by strong business cash flows and additional reinsurance credit. Regarding the fourth quarter dividend, Enact is evaluating economic and business conditions, including the resolution of forbearance related delinquencies. Assuming these conditions remain supportive, Enact intends to recommend to their board the approval of a $200 million dividend. Genworth would receive its pro…

Thank you. Ladies and gentlemen, we will now begin the Q&A portion of the call. [Operator Instructions] We'll go first to Ryan Krueger with KBW.

Hey, guys, good morning. I have a few questions since it's been a while. Maybe first, could you just provide an update on the status of the AXA counter lawsuit against Santander? And any sense of when this decision could be made and how much potential recovery you could get?

So Ryan, I'll take that one. It’s a good question, we get it often. So, I would say that that act to Santander litigation process is going through the UK courts. You normally expect 18-months, 24-months for it to be resolved. Our understanding is given COVID-19 in the UK, I'm sure it's the case in the U.S. as well that the court dockets on this litigation are more challenged than they used to be. So, the guidance would be probably a couple of years from when it started, which was January of this year, could be delayed more than normal because of the COVID-19 backlog. In terms of amounts, we faced significant amounts to AXA under our guarantee. And if the AXA wins in the litigation, we would expect the amounts that we've paid. We would have the ability to ultimately recover a significant amount. But, that really depends on how litigation goes. And so it's pretty hard for us at this point to assess. But I would say depending on how the litigation process goes, there's a potential for significant upside, depending on how the case plays out.

Thanks. I think another question was on targeted debt as well as capital return. I guess, maybe the question is, long-term, is your plan to eventually fully separate Enact? And I guess if so, I would think the goal would be to pay down debt to zero to enable that to happen. So kind of an update on that in regards to your statements on $1 billion long-term debt target and returning capital to shareholders?

Thanks, Ryan. I'll take the first part of that, and maybe ask Dan to comment. So, our goal is to get the long-term debt to around $1 billion range. And that's been as you know a target for a while. And realistically, we're talking about $900 million. And so when we get the debt to the 2034, and the 2066, the $900 million, obviously, a very long time before we have to make any principal payments, and add that level of debt, I think the interest payments are in the $40 million range. So, very manageable for us. So that's sort of why we have that as a target. Longer-term, we could keep our 81.6% of Enact for we said for the foreseeable future. We obviously have options to either spin-off, we've talked about that, 81.6% to shareholders on a tax free basis, depending on where we are down the road. That could be an attractive option. There are obviously other options. I do think you're right that in terms of our long-term goals, we want the U.S. Life companies to be able to stand on their own. And right now, because we don't anticipate any dividends from the life company. That would mean the life company couldn't carry any debt. However, as I talked about on the call, and I've talked about before, to the extent that the new business opportunities we see in LTC, we think they're attractive and over time, if the life companies through the new growth business and capital produce from that, it could be that the life company could handle some debt in the future. But absent an ability of the life companies to pay dividends, and that will be from the new business, not from the legacy companies. But absent dividends flow from the new companies, but life company really can’t have significant debt. Dan, you want to add anything to that?

And then just -- oh, good.

Yeah, Tom, I would just reiterate that once we pay off the ‘23s, and the ‘24s, we've got 10-years plus of runway with that service in the $35 million to $40 million range to give us the utmost flexibility. And so, if ultimately, life companies can support that level of debt service, we'd have the option to spin off the company. If they cannot, then I think the point is right, that we would look at potentially paying down the rest of the debt. That was still our goal.

One last question is, and I know this is somewhat challenging, but can you give any sense in a more normal year, I guess, without COVID, what level of cash tax inflows you might expect at the holding company?

Dan, I'll let you take that one. It’s a good question.

Yeah, so the tax question, it really is a question that's really directly tied to earnings. And we haven't provided forward guidance on earnings. But I can give you kind of a rule of thumb way to think about the taxes. And what I would do there is just break it into two parts. And I would look at your models earnings for Enact at around the 20%, 21% tax rate. So a normal tax rate there, that will get you in the ballpark for what we would expect Enact’s payments to the Holdco, obviously, adjusting for our ownership interest. On the life side, we do have some sort of legacy issues for starting swaps and others that are taxed at a higher rate. So the tax rate for the life side is going to be a little bit higher than 21%. But the way I would think about this is not so much looking at GAAP earnings, but looking at stat earnings, and that's one of the reasons why we've added profits followed by losses information to our presentation into our materials. And if you look at this quarter, we had $129 million after tax in profits followed by losses. And so if you want to sort of convert to an approximation for what the stat earnings would likely be, and just use a slightly higher tax rate, those two components when put together get you really right to the approximate tax number, which is the cash payment of the holding company. So, as you look at what you're modeling going forward, and you just use those rule of thumb, I think you'll get pretty close.

That's helpful. Thank you.

Thank you. We'll take our next question from Ryan Gilbert with BTIG.

Hi. Thanks, everyone. Good morning. My first question was on the debt maturities. I appreciate the color around the 2023 note. Do you have any, I guess, timing that you can offer on when you intend to retire the 2024 maturity?

Dan, I think that's a good question for you.

Yeah, I think if you look at our cash positions as of the end of third quarter, we're obviously in a very good position to pay off the ‘23s. What we said is that we will pay off the ’23 once Enact declares a dividend, that would give us approximately $400 million, if you just sort of add third quarter cash plus the dividend, which puts us in a position to be set up reasonably well for the ‘24s. But the timing of paying off the ‘24s, first of all, we have a lot of time between now and the 2024 maturity. I think we will balance a number of factors, including what the cash flows look like quarter by quarter. So at this point, I think it's our expectation we'd be in a position to pay that off early. But we're not yet ready to declare timing as it relates to that. But certainly, if fourth quarter goes as expected, and we do get the dividend ultimately from Enact, we'll be a lot closer to being able to provide guidance on that.

Okay, great. So point being those that you feel comfortable that you can prepay those, and you're not going to pay down on maturity. Got it. Second question is on can you remind us what your NOL position looks like? And the extent that your NOLs are contributing to the cash tax payments that you're getting from the subsidiaries?

Yeah, what I would say is that as of third quarter, we've effectively used all of the tax assets that are on the balance sheet. And we're really into sort of normal tax planning mode. And what we said is that we in the near-term do not expect to be as cash taxpayer at the federal level, which means that we do have sort of normal cash tax planning strategies that we're implementing that will allow the cash to come to the Holdco, at least in the near-term. But, I think in the medium-term, to the extent that we continue to see very strong earnings from both Enact and life companies, I think ultimately we will be a cash taxpayer.

Okay, great. Last one for me is on the shortfall in the LTC business. I think over the last few years, the gap has been around $8 billion. Is that how we should be thinking about it for as we get into fourth quarter and 2022? Or do you think that this increase that you're telegraphing here could be outsized relative to what we've seen over the past couple of years?

Well, Ryan, I think what we've said is, we do think the benefit utilization trend that we're looking at is a significant assumption. And if we ultimately -- we’re still reviewing that, obviously, we're still in the middle of the fourth quarter. But if we change that could be significant. What we've also said is, to the extent that we do make a change, we do think we will be fully able to recover that dollar for dollar with an expansion of our multi-year rate action plan. So, I think, because we've had so many questions over the years on how should investors understand where we are, I do think a convenient way to look at it in an economic basis is what is the shortfall, and then what is the net present value that we've achieved. So that gap, as you said it varies, at the end of the third quarter, it's lower than where it was at the end of last year. So it was $22.5 billion less $16.3 billion or $6.2 billion. But it has been a different amount than that. It's been $8 billion it's been $9 billion, if you go back several years, it's been $10 billion. So I think, it's less important, I think, what the gap is. It's more important, do we think working with regulators, we can recover that in terms of future premium increases. And the one thing I'll say, and I did thank the insurance regulators, some of whom on the call, I think we've really over a long period of time now, eight or nine years that we've been working on it, we have a very good relationship with the regulators in all 50 states. There are still some states that are ahead of other states on what they've…

Okay, understood. I appreciate it. Thanks very much.

Thanks, Ryan.

We'll take our next question are from Joshua Esterov with CreditSights.

Hey, good morning. Appreciate you taking my question. Sort of a follow-up to the question just a little while ago. But can you give us a sense of the magnitude of the strengthening or alternatively, where the benefit utilization trend assumption is currently versus where it might be set? And sort of a follow-up to that how you expect the reserve strengthening to impact the life company's ability to send tax sharing payments to the parent, either for the fourth quarter or into next year? Thanks.

Yeah, so it's a good question, it's a very complicated question. The first thing I'd say is, it's November 3, so we've got quite a bit of work still to do to make an ultimate decision on that. I do think, based on what we're seeing, it's more likely than not that we'll make a change in that benefit utilization reserve. But again, this is a margin testing issue. So this is not related to current U.S. GAAP earnings or statutory earnings. This would be -- if we make the change, we'll pay those claims over a long period of time. And we've got a long period of time to cover those costs through premium increases or benefit reductions. I would not expect, Josh, that those changes would have a material impact on statutory earnings for the balance of this year or next year. And we did give you on that $slide 11, some of the trends. And so, I think this is a margin long-term cash flow impact down the road, it isn't so much will impact short-term earnings. Short-term earnings are based on the actual claims you pay. And so, to the extent we weren't able to assume we can recover that increase in reserves, both through future payments and ultimately had a premium deficiency, we didn't have a positive margin that would have a short-term impact. So, I think from a -- if you look at earnings in the near-term, they won't be significantly impacted by these changes, if we make the change.

Got it. Thank you. Appreciate the color. And just to make sure I understood correctly, what you just mentioned. So your base expectation, at least at this point, I recognize there's still work to do is that there would still remain a greater than zero margin for reserve testing purposes, inclusive of a revised MYRAP plan, correct?

Yeah. Well, yep. I would say Josh, with the caveat, let us do the work. And we've got a ways to go. But basically, we assume that whatever change we may make, we will expand the MYRAP. And, I think basically, as you've seen, the U.S. GAAP margin and the statutory margin are different, because the testing are different, one is pre-tax, one is after tax. One has prescribed statutory interest rates, the other has the portfolio rate. So there's a lot of complexity. But I would say that the bottom line is that we would expect that from a margin perspective, that whatever changes we make on assumptions, assuming we can recover, and we're confident of that, there wouldn't be a material change in the margin. And we would expect after we complete the analysis, with the caveat that we're not there, and things could change that the margin, likely both on the loss recognition test in the U.S. GAAP margin, the step margin would roughly be in the ranges they've been in. Obviously, we have a range for the U.S. GAAP margin $500 million to $1 billion. And so we would expect after whatever changes we're going to make, assuming we can expand the MYRAP for the margin to be somewhere within that range.

Very helpful. Thank you very much.

You're welcome, Josh.

Ladies and gentlemen, we have time for one final question from Geoffrey Dunn with Dowling & Partners.

Thanks, good morning. If you're able to retire your ‘23s after the Enact dividend, can you share any estimate of MAKO [ph] and potential accrued interest at that point on top of principal debt?

Good question, Geoff. I’ll get back to Dan.

Yeah. Thanks, Tom. Certainly, it depends on the level of interest rates at the time, but I would expect that number to be between $30 million and $40 million.

Okay. And then can you also remind as we consider the potential for early on the ‘24s, the liquidity target you're aiming to have at the Holdco?

Yeah. I mean, what we’ve said generally speaking, is that we'd like to have two times debt service coverage. As our level of debt has come down, we've sort of thrown a number out there around $200 million. Certainly, as we pay down the ‘23s and ‘24s, we would revisit that and there would be opportunity to reduce that. But at this point, we're still thinking about the number around $200 million.

Okay, thanks.

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

Katie, thank you very much. And I want to thank all of the people on the call today for joining the call. I also want to thank the two Ryan's, Josh and Geoff, for what I thought were excellent questions, right on point and hopefully we've been able to answer those well. The bottom line is, I think we had an excellent third quarter. We've had a good year so far through the nine months. We're very happy with the operating results, the progress we've made against those five strategic priorities. And we're very excited that we've had a turning point and going forward, we're pretty positive on Genworth’s future. And obviously, we look forward to talking to you again next quarter, to give you an update and talk about where we are against executing on those priorities. So, with that, thank you. Thanks for your interest and support of Genworth, and I'll turn the call back to Katie to end the call.

Thank you. Ladies and gentlemen, this concludes Genworth’s financials third quarter conference call. Thank you for your participation. At this time, the call will end.