Good morning, 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 the conference call. As a reminder, this conference is being recorded for replay purposes. [Operator Instructions] I would now like to turn the presentation over to Sarah Cruz [ph], Director of Investor Relations. Ms. Cruz, you may proceed.

Thank you, operator. Good morning, and welcome to Genworth's fourth quarter 2021 earnings call. All of our speakers are remote this morning, and we ask that you excuse 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 Haendiges, President of our US Life Insurance Segment, and Jerome Upton, Deputy Chief Financial Officer will also be available to take your questions. The slide presentation that accompanies this call is available in 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. 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 presentations 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 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. Sarah has been with Genworth for 10 years and she held several leadership roles in Genworth's finance organization. She knows Genworth and our two businesses very well. We refreshed Genworth's, Board of Directors over the last two years with the addition of four new directors, who received strong support at Genworth's May 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 Genworth leaders to the C-suite effective on January 1, 2022, Melissa Hagerman and Greg Karawan. Melissa was appointed Executive Vice President and Chief Human Resources Officer. She's a strong advocate for our people and understands the vital role they play in delivering current results and implementing our vision for the future. She has played a leading role on Genworth's HR team including working with generous various businesses and functional units. She will focus on our post-COVID strategy, our return-to-work arrangements, talent management and talent development of Genworth's key leaders and managers. Greg was named Executive Vice President and General Counsel. Greg hails from Brooklyn and has a strong litigation background. He led Genworth's litigation function for many years. He was also instrumental in the resolution of the AXA litigation with Genworth and as Genworth's Chief Liaison with AXA in their ongoing legal dispute with Banco Santander. Greg has also been the top legal officer for Genworth's U.S. Life division for many years. Let me now turn to Genworth's outstanding performance for the full year 2021. Genworth's US GAAP net income for the full year…

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 $0.32 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 Enact Holdings posted its earnings call earlier this morning and provide a detailed update on its results for the quarter, so I'll focus on the key highlights. For the fourth quarter, Enact reported adjusted operating income of $125 million 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's 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, Enact's adjusted operating income increased largely driven by the favorable reserve development in the quarter. Enact saw a 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, Enact finished the quarter with an estimated PMIER sufficiency ratio of 165%, or approximately $2 billion of published requirements. The decline in the PMIER sufficiency versus the prior quarter was largely driven by the dividend they paid in the…

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

Hi. Good morning. Could 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 future premium rate increases? In other words, I'm just trying to isolate what the assumption changes were prior to then assuming higher future premium increases?

Dan, do you want to cover that?

Yeah. Thanks, Tom. So Ryan, if you look at page 9 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 is 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 life side, the biggest impact was the benefit utilization, where we look at our long-term assumptions and we updated them to reflect 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 passed through at different state levels. The other assumptions that were material enough to mention here was healthy life mortality, and that's to reflect emerging experience. I should note that, we did not include any experience from the COVID 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 to the point that you mentioned we did offset that with rate increases.

Got it. I guess, the separate question is, I guess it sounds like – Tom, you mentioned, the potential to spin off Enact eventually over time, but it sounds like it's contingent on getting more rate increases in LTC that you feel like that can stand alone. How does the – I guess, the potential to recover some of the AXA proceeds come into play? I guess, if you did receive a material amount back from that would that potentially accelerate your ability to spin off Enact, or is it more dependent on long-term care rate increases and 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 both our capital management program. We could also further reduce debt. It would help, if we have any capital investment in the new business. And clearly, it would help us with the spin-off. The issue is – it's pretty clear, the value of the spin-off. And obviously, our shareholders recognize that value. The challenge is the RemainCo and our view is we would need RemainCo 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. And we talked about, we're making great progress there. So I think that will continue, very confident in that. And then these growth strategies hopefully they will produce good results sooner rather than later. And I think if RemainCo therefore based on not a large gap remaining to breakeven and investors can see the growth potential, then I think that helps with the timing of the tax-free spin-off.

Thanks. And then just last question. On capital return, I guess, are you contemplating share repurchase, or is it more focused on the potential dividend?

Ryan, we'll evaluate that. But I think, there's -- Dan and I talked a lot of our big shareholders and even our retail shareholders. Some prefer share buybacks, some dividends. My guess is that in the early days, capital management and maybe more share repurchases than a regular dividend, but we'll look at them.

Understood. Thanks for the answers.

Thanks, Ryan.

We'll go next to Joshua Esterov with CreditSights.

Hi. Good morning. Appreciate the time. Nice quarter today. I have a couple of questions for you folks. First, in light thinking about the term life reinsurance transaction that you executed, how well do the legacy fixed annuity or the variable annuity policies in the runoff segment still fit into the overall scheme? Obviously, there's been a lot of interest from third parties in acquiring or reinsuring some of these blocks of businesses. And I'm wondering if Genworth has been exploring options for that -- for those products potentially for the purposes of further bolstering RBC ratios as well.

Look, I think we remain very open to transactions that make sense and add value. So we did the life transaction. Clearly, there are parties as you mentioned, Josh, that have interest in fixed annuities. And as those opportunities 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 it made sense to move forward with it. And there was a significant benefit to stat capital. I think Dan said $170 million.

Got it. Thank you. And kind of as a follow-up to that, is there anything in particular about 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 mentioned in your prepared remarks with -- resuming some kind of LTC, whether that's direct insurance or services business?

Yes. I would -- good questions, Josh. I would say, on the variable annuity, it's been a run-off a long time. And it's a relatively small block, I think around $5 billion. And we're open to opportunities there, but it's relatively small. On fixed annuity, and you can see in the quarterly results and the full year results, it's performing very well. So it provides a very good statutory in US GAAP earnings. On the other hand, if we get a very attractive offer and value, we'd certainly consider selling it or reinsuring it. It really comes down to -- and of course, like everyone, we get calls all the time on this. It comes down to an economic analysis. Does it make more sense to hold it and with the earnings that come with it, or is an offer on the reinsurance or deal strong enough where it makes sense to do the transaction versus holding it? So that's the balance we do.

Understood. Appreciate that. And then separately, obviously, you've done a fantastic job of reducing the overall parent company debt burden. 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 example, like, in the fourth quarter you took out a portion of the 2024s. And you noted earlier that you intend to continue to take out that obligation. Those are trading above par at this point. Some other securities, namely, thinking about 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 trying to get a sense of your thoughts on that. And maybe even further out beyond that, where do you feel you stand with regards to maybe, at some point, access to the debt markets to potentially fuel repurchase activity, share repurchase activity?

Well, there's a lot there, Josh. And so, I would say -- and I'll turn over to Dan in a second on the specifics. But at a strategic level, I think, the first priority would be to redeem the $280 million of 2024s that are outstanding. That's a huge thing when we get there because that would mean the remaining debt is $900 million. The 2034s million and the 2066s the interest expense is $35 million to $40 million. So we got our interest coverage ratio and we get the debt there in a very strong place. Certainly, our debt to capital interest coverage would be investment grade. And so, we're hopeful the rating agencies will see that. The 2066, yes, they're trading below 100. But as most companies when they have these hybrid securities and you have senior securities like the 2034s ahead of it we would have -- before we could repurchase the 2066, we'd have to take the 2034s out. And there are pluses and minuses to that. So I think where we are, is we'll definitely take the 2024s out, I think, this year. And then the others, we'll see. I don't think you'll see us issue shares to buy back -- 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 see us -- we've been -- I've been here nine years. We've gone from over $4 billion of debt to $900 million and we're very comfortable with that. So as I said in my remarks, the lowest debt-to-capital ratio in the industry -- among the lowest and the -- with the annual interest so low, we're really out of place. We have a very strong balance sheet now and so we wouldn't want to jeopardize that. There are also some rating agency and debt-to-capital issues that -- with the GSEs have for the parent. Dan, do you want to just give a flavor for -- we did do quite a bit of repurchase of the 2024s and just how you and your team look at the outstanding debt and the trading opportunities such as ours?

Yes. Thanks, Tom. So I'll back into this a little bit. We ended the year at $356 million in the past, which is in excess of the amount we have remaining on the 2024s at $280 million. Once we pay off the 2024s our thought is that we would want to hold somewhere between, let's call it, $100 million to $125 million, maybe as much as $150 million of cash. And so, if you think about that, we need a couple of more quarters of internal cash generation from cash tax payments and hopefully ultimately a dividend from Enact to get to that level. Once we do, we'll be in a position to consider paying off early the 2024s. And we'll assess that quarter-by-quarter, as we continue to make progress here. Beyond 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 in getting ourselves in a position to pay off those 2024s and hit our debt target.

Thank you both very much. Appreciate all the feedback.

Thank you, Joshua.

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

Hi. Thanks very much. Good morning, everyone. First question's on holding company cash in 2022 and sources of uses. It sounds like based on the comments that you just made the -- retiring the remaining 2024s will be a use of cash in 2022. Is there any way you can quantify sources and uses for the other line items over the year?

I'll let you handle that one Dan.

Yeah. 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. I would just state one thing related to that which is it will be a little bit front-end loaded in that we've had a very good year in 2021 and there will be a little bit of a catch-up payment in the first quarter. So if it looks like we're ahead of the plan at that point, I would just hold off on changing those estimates. What I would say in terms of sources and uses, I mean for the most part, our expenses are debt service coverage at this point. We've got a little bit of ins and outs beyond that. We do fund compensation earlier in the year and get reimbursed and so there will 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 in conjunction with the LDTI accounting change. Does that play into your consideration on dividends versus repurchases? And basically, what I mean is, if there's a significant reduction in book value then repurchase might be less accretive than -- to book value per share than what it currently screens at?

Well, Ryan, I would say that we're very much looking forward. As Dan said, it's been a while since we've been able in more than a decade to return capital to shareholders. So we are very anxious to implement a capital management program. I think we'll do that this year and we'll have more to say to that next quarter in May. Between regular dividends or share buybacks, obviously we'll look at that at the time. LDTI and US GAAP accounting changes, it's going to be interesting because the biggest change there and you can argue that as we decided what they decided. But the biggest impact of LDTI is the discount rate. 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 I would argue discounting at the earn rates probably more what I think makes sense. I think – I guess the FASB decided the A rate is more of a current market rate. So you look at the liabilities with that discount rate. I don't think it's going to have a big impact on our capital management how we look at regular dividends versus share buybacks. I also think the regulators really don't focus at all on US GAAP. And I think they'll certainly look at what the implications are of LDTI, but 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. We'll have more to say that – on that in the details on mid-year. We certainly will evaluate the pluses and minuses of either. But I don't see LDTI itself as having a significant impact of what we decided to do. Some of it will be based on feedback from shareholders in terms of how they balance repurchases for dividends. I will say and Dan and I talk to shareholders all the – investors and shareholders all the time, there seems to be somewhat of a priority for buybacks over regular dividends but we'll look at it at the time. And I think the Board, Dan 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 from me on the – just on the LTC business and the MYRAP. I appreciate all the commentary this quarter. But I do want to acknowledge that it looks like the deficit between the approval and the needed increases on a cash basis has expanded to over $9 billion from $8 billion last year. And you said that 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 your ability to close the gap? Is it just you're picking up the pace on getting premium rate increases approved, or do you think you're near the tail end of the assumption revisions? Any specifics would be helpful.

Yes. So Ryan great questions and it's a complex question. But I would refer you to Slide 14. I think Slide 14 has a lot of very viable information. And if you look at – the two biggest blocks are Choice I and Choice II. And together there are about 650,000 policies. So that's about 65%. And the average age for Choice I rounded to 75; for Choice II it's 72. So therefore – and with the peak claim years being sort of mid-80s or call it 80 to 85, somewhere in there on Choice I, it's five to 10 years before those policyholders really get to their pre-claim here. There are some claims – and you can see it again on that Page 14. And for Choice II, it's eight to 13 years. So we're going to have several years before we get to those peak claim years, a very strong statutory earnings, which will build statutory capital. And we had a record year this year of approved premium increases, $403 million. We had never gone over $400 million. But each of the last three -- if you look at the last three years and go back on approved premium increases they were $350 million or more each year. If you go back to six years ago that's a significant increase in the amount of approved increases for the last few years. So I just think what's different today is regulators are much more comfortable giving premium increases. I said Jamal and her team do a great job. I think regulators definitely acknowledge that we have a very strong projection model. And so yes the -- we did -- it did increase the $9 billion. Dan went through the numbers, but we've gotten $20 billion with $5.1 billion in…

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

Yeah. Thank you Ryan.

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 you heard both Dan and I say of Genworth's 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 in 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 pleased that we think later this year again a little more to say 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 and 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 and 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.