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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.
Our actual results may differ materially from such statements.
Also, references to statuary results are estimates due to the timing of the filing of the statutory statements.
We are pleased to report another very strong quarter of operating performance, continuing the recent momentum in our businesses.
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.
The 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.
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 performance and its impact on Genworth's consolidated results.
We wanted to get another 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 are 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 legacy LTC portfolio, advance our LTC growth initiatives, and return capital to shareholders.
Enact is a valuable business with a leading market position and attractive growth opportunities.
We monetize part of our ownership stake during the third quarter through the successful minority IPO, which created significant value for both companies.
Genworth received aggregate net proceeds of approximately $529 million from the IPO.
We use those proceeds to retire in full our outstanding promissory note to AXA of approximately $296 million, nearly a year ahead of schedule.
After the IPO, both Moody's and S&P issued upgrades to some of our ratings and outlooks as well as those of Enact, reflecting further improvement in our financial flexibility and credit risk profile.
We are proud of this outcome and the work we've done today to support these upgrades.
After the IPO, our ownership of Enact decreased from 100% to 81.6%.
We intend to maintain our position for the foreseeable future.
We expect our majority ownership in Enact to generate a significant dividend stream and to be an important source of cash flow going forward.
Next, I'd like to highlight the significant reduction in debt that we have achieved.
Inclusive of the $296 million AXA note repayment, we have reduced holding company debt by $1.5 billion year to date.
We are proud of this progress, which brings us closer to our target debt of approximately $1 billion.
We also made progress toward stabilizing our legacy LTC portfolio this quarter, primarily through our Multi-Year Rate Action Plan or MYRAP.
We have achieved approximately $323 million in rate action approvals year to date, including $117 million in the third quarter, which brings our cumulative total to over $16.3 billion on a net present value basis since 2012.
Pursuing these actual justified rate actions is critical to achieving breakeven on an economic basis for the legacy LTC business over time.
Since 2019, the annual benefit from IFAs has more than offset our statutory losses from our legacy LTC products.
In 2021, this included the impact of a illegal settlement.
As you can see on Slide 11, IFAs are critical to ensuring that premiums exceed payouts, helping to mitigate the risk of large losses in our legacy LTC business in the near term.
Over the longer term, we will reach a point when premiums will no longer exceed payouts and the losses that gave rise to our assumption for the shortfall will emerge.
That's why we're continuing to pursue IFAs while also addressing high risk LTC categories like policies with compounding benefit increases.
We're doing this by offering reduced benefit packages, which provide flexibility to policyholders facing a premium rate increases and which also limit tail risk to Genworth.
We're also developing care management initiatives to work to reduce both the likelihood of people needing care and the level of care they require.
Through IFA, benefit reductions, and care management, we are effectively working to mitigate both near-term and long-term risk associated with our legacy books.
And as you can see on Slide 10, we've made excellent progress on the long-term challenge as benefit reduction options continue to be selected at a higher frequency by our policyholders.
As of September 30, 2021, approximately 43% of Genworth's LTC policyholders have opted some form of reduced benefit option.
Taking a step back, the cumulative effect of rate increases, IFAs, achieved since 2013 has positioned us well to meet obligations over the intermediate term.
We've achieved over $16.3 billion in rate increases on a net present value basis against the current estimated $22.5 million shortfall in our legacy LTC business.
The continued focus on behalf of reductions in care management will help to reduce risk over the long term.
We are currently conducting our annual assumption review and expect to strengthen one of our assumptions for benefit utilization rate at the end of the year, just as that we have strengthened other assumptions to bring them in line with long-term expectations.
This assumption is a key driver of results and is expected to significantly increase our estimated shortfall, reflecting how our experience has evolved.
When our best estimates change and require the strengthening of assumptions, policyholders benefit from strong reserves backing our liabilities.
And as with prior assumptions strengthening, we continue to see broad based support from regulators for actuarially justified rate increases and fully expect these assumptions strengthening to be offset by allowed expansion of our multi-year right action plan.
With the combined effect of prior year IFAs, assumptions strengthening coupled with new IFAs, benefit reductions in care management, we remain confident in our ability to achieve economic breakeven.
We will share more details from our assumptions review on our fourth quarter call.
I also want to highlight the excellent work being done by our U.S. life colleague led by president and CEO, Brian Haendiges.
Brian joined Genworth as chief risk officer in 2020 and took on his current role in February this year.
He has been instrumental in further accelerating risk reduction in our legacy LTC blocks so that we are better positioned to pay benefits over the long term.
He will continue to play a key leadership role in this effort moving forward as well as helping us advance our strategic growth agenda in long-term care.
Before I move on to our LTC growth initiatives, I want to briefly touch on the upcoming changes to U.S. GAAP accounting under the new long duration target improvement or LDPI, standards that were issued by the Financial Accounting Standards Board.
We are preparing for the implementation of these new roles and expect to provide shareholders with a view on the expected impact sometime next year.
I have the effective date in January of 2023.
I want to note that the relative impact of these new accounting rules may be greater for Genworth Life Insurance Company compared to other life insurers, given that our U.S. life portfolio is weighted toward traditional long duration insurance liabilities, including long-term care insurance.
Accordingly, we expect a material impact on our U.S. GAAP balance sheet and income statements upon adoption in 2023 and going forward, including a significant reduction of our U.S. GAAP book value or equity.
GAAP book value for legacy life companies is expected to be significantly lower going forward under the new accounting.
The old U.S. GAAP long duration accounting was based on original pricing assumptions.
The new LDTI accounting will change from the original pricing regime to a best estimate or market-oriented accounting model.
The anticipated reduction in U.S. life's book value is a U.S. GAAP accounting change only.
It will not impact economic cash flows.
The best indicator of current and future economic cash flows for U.S. life and the legacy LTC business remains the statutory cash flow testing regime under statutory accounting.
insurance companies and improving dividends from operating insurance companies to their holding companies.
Statutory accounting for U.S. life will not be impacted by the LDTI U.S. GAAP accounting changes.
The new rules will have no impact on cash or cash flow and they do not change U.S. GAAP accounting for now.
Also as a reminder, we view the value of our U.S. life insurance legacy business at zero, given that we do not expect insurance regulators to approve future dividends from our legacy life companies for the foreseeable future.
At the same time, we have no plans to contribute a holding company capital into the legacy life insurance businesses.
The legacy U.S. life insurance legal entity will continue to fund claims using their existing reserves, statutory capital of $2.5 billion as of the end of June, and the actuarially justified multi-year rate action plan.
Given the importance of our statutory results and statutory cash flow and statutory capital levels to our regulators and our reliance upon these results to track the progress and impact of our LTC multi-year rate action plan, we are including new supplemental statutory earnings and capital information in our slides today and plan to do so moving forward.
Now turning to our next priority, advancing LTC growth initiatives.
We continue to work toward launching a new and innovative platform that will help address the societal need for long-term care in the U.S. The need for senior care is large and growing given by an aging population, longer life expectancy, increasing need for care, and rising care costs.
As reported in our Billion Dollar study published earlier this week.
Long-term care needs -- continue to have significant impacts on aging Americans and their families.
The vast majority of Americans are unprepared financially and unsupported in navigating care and health needs in their daily lives.
While we'll need a substantial, past [Inaudible] stand-alone LTC insurance offerings have been largely unsuccessful in addressing the needs of customers, who face these challenges, resulting in historically low LTC product penetration.
Meanwhile insurers have struggled with an ineffective distribution model and unprofitable economics and have attempted to innovate only on the edges to increase lives insured with hybrid offerings.
We believe the market is ripe for innovation and that Genworth with our 40-plus years of LTC experience and expertise is uniquely prepared to capitalize on this opportunity.
As we've said before, we believe a successful reinvigoration of the U.S. LTC market will address both financing and services and ultimately will help to reduce the likelihood of people needing care and/or less than the cost of care that they need.
Our long-term LTC growth strategy assumes that future revenues will be weighted more toward capital-light service and advice offerings versus risk-bearing highly regulated and capital-intensive LTC insurance products.
We believe future LTC products and services will require significantly less capital, have less risk, and produce higher returns for shareholders.
We believe the capital requirements will be moderate, given the anticipated lower level of risk.
As an initial step, we're working on expanding our services offering through our existing subsidiary CareScout, which is a leading provider of clinical assessments and care support solutions for insurers, healthcare organizations, and consumers.
We plan to invest a modest initial amount approximately $5 million to $10 million to recapitalize and scale this CareScout business so that we can offer more fee-based services going forward.
But at the same time, we're also working with a highly rated reinsurance partner on launching LTC insurance products with lower and more predictable risks than in the past.
The first product will be a low risk individual LTC insurance product with a significant amount of the risk we insured by our partner.
However, we firmly believe that the ability to rerate LTC policies annually is absolutely critical success to future LTC insurance products.
Accordingly, we don't intend to start writing new business until enough states support the need for annual rerating, enabling us to launch a business that a sustainable, scalable, and profitable we're engaging with our state insurance regulators on this topic and we're working toward launching our first new LTC insurance product with our reinsurance partner in the first half of next year.
We are still in early stages of engaging with rating agencies and other stakeholders and look forward to sharing our progress toward launching this new business on future costs.
As we chart a course to future growth, returning to capital -- returning capital to shareholders remains a top priority.
After we receive our -- after we achieve our debt target of approximately $1 billion.
We plan to return capital to shareholders via regular dividend and or share buybacks while also making prudent investments in our LTC growth initiatives.
This commitment to shareholder is an important part of our story in the near to medium term.
And over the longer term, we believe there is a significant opportunity to transform the LTC industry through the successful execution of our growth strategy.
Our vision to build a leading profitable platform that offers holistic solutions to the challenges of aging is a unique value proposition in the marketplace and will put Genworth in a category of one.
We know that realizing this vision will take time and we can't do it alone.
It will take partnerships with other companies and continued collaboration with regulators and other stakeholders to bring these new solutions to market and create value over time.
We look forward to sharing updates in due course.
They have both served as important counsel and partners in guiding Genworth's progress.
As we move into the next phase of Genworth's journey on more stable footing, they each have decided that now is the right time to move on to their own next phases.
Ward's decision to retire comes after 24 years with Genworth, taking the company through its recovery from the financial crisis and its several strategic review processes throughout which he has built strong relationships within Genworth and the regulatory community.
I respect her decision to depart Genworth to be closer to our family in New Jersey and I wish her and her family well.
Both positions will be filled by long-serving Genworth leaders, and I have every confidence and their ability to help lead Genworth through its next chapter.
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 retire 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 enhanced our liquidity position.
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 16th of $4 million and adjusted operating income for the third quarter.
Enact finished the quarter with an estimated PMR sufficiency ratio of 181%, approximately $2.3 billion above published requirements.
The improvement in the PMR sufficiency versus the prior quarter was driven by strong business cash flows and additional reinsurance credit.
Regarding a 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 rata share of that dividend based on its ownership interest or approximately $160 million.
Life segment, overall result was solid in the quarter at $93 million, driven by the continued strength of the LTC in-force rate action plan and variable investment income.
Mortality continue to be elevated in the quarter in part from COVID-19, which negatively impacted our life insurance results.
Long-term care had adjusted operating income of $133 million, compared to $98 million in the prior quarter and $59 million in the prior year.
As we discussed last quarter, our overall GAAP margins are slightly positive.
We've established a GAAP-only profits followed by losses reserve, which covers projected losses in the future.
As of the third quarter, the pre-tax balance of this reserve was $1.1 billion, up from $625 million as of year end 2020.
This reduced LTC earnings by $129 million after tax during the quarter.
Earnings from in-force rate actions of $304 million prior to profits followed by losses increased versus the prior year.
The Choice I legal settlement that we discussed last quarter favorably impacted our results by $48 million or $16 million after profits followed by losses.
As of quarter end, 42% of the settlement class have reached the end of their selection period and we expect the remaining class members to make their elections by mid-2022.
We also have an agreement for a similar settlement for PCS1 and PCS2 policy forms to still subject to final court approval, the process underway.
If approved in a timely fashion, we expect claimants to start making their elections mid to late 2022.
At this time, it's difficult to assess the overall impact of these legal settlements will have going forward as full implementation will take another one to two years.
Shifting to in-force rate action approvals to LTC, during the quarter, we received approvals impacting approximately $394 million of premiums with a weighted average approval rate 30%.
Year to date, we received approvals impacting $871 million of premiums, the weighted average approval rate of 37%, up from the comparable period last year when we received approvals impacting $595 million in premiums with the weighted average approval rate of 29%.
Our quarterly approvals are uneven.
We expect approvals in the fourth quarter and 2022 to be strong based on pending filings and regulators recognition of the importance of actuarially justified rate increases for Genworth and the industry.
We experienced favorable variable investment income in LTC again this quarter, reflecting higher limited partnership income, gains on Treasury Inflation Protected Securities and bond calls and mortgage prepayments.
While we have seen very strong variable net investment income this year.
We do expect this investment performance to moderate over time.
We did not materially adjust our previously established COVID reserve for mortality during the quarter.
as the pandemic continues to develop, mortality experience may fluctuate in the near term and we will increase or decrease the COVID-19 mortality adjustment accordingly.
New active claims have trended up gradually in 2021 although incidence remains lower than pre-pandemic levels and continues to drive favorable IBNR development during the quarter.
Pending claims submissions, which are a leading indicator of future new claim incidents, increased during the quarter and versus the prior year.
We expect to complete our claims assumption review in the fourth quarter while this work is ongoing and not completed.
Preliminary indications are that our claim reserve assumptions are holding up in the aggregate.
We also plan to complete our review of assumptions related to our active life reserves as well as loss recognition testing and statutory cash flow testing in the fourth quarter.
For these updates, we're generally not including data from 2020 or later in setting any long-term assumptions as we do not yet have sufficient information around longer term effects of the pandemic.
As Tom mentioned, a key area of focus for this year's active life reserve review is the utilization trend assumption, which reflects our view of how benefit utilization will emerge in the future.
Although our recent utilization experience has generally been favorable, we believe this is primarily driven by the pandemic and temporary in nature.
Another area of focus for the utilization assumption is the growth rate of the cost of care in our 2021 review as we compare our long-term assumption for our accumulated experience as well as to industry benchmarks.
While the expected change in the long-term utilization assumption would significantly increase the $22.5 billion legacy shortfall, as Tom stated, we plan to offset the increase to an expansion of our multi-year rate action plan.
We also continue to focus our discussions with regulators on refining options available to policyholders and responding to adverse changes and experience in a timely matter.
We expect to finalize our assumption review in the fourth quarter and we'll share more detail about these updates and associated margin impacts at that time.
Turning to life insurance, overall mortality for the quarter continue to be elevated versus historical experience, including the prior quarter and prior year.
Our third quarter included an estimate of approximately $24 million after tax in COVID-19 claims based upon death certificates received to date.
In our term Universal Life and Universal Life products, we recorded a $30 million after tax charge for DAC recoverability, up from $13 million in the prior quarter.
The charges continue to reflect the unfavorable mortality experience and continued block runoff.
Like LTC, we're generally not including data from 2020 or later in setting any long-term assumptions in life insurance.
However, we're closely monitor in our elevated mortality experience in the context of the ongoing pandemic, including older age mortality as well as mortality improvement.
With respect to interest rates, we're focused on our long-term view of interest rates and current portfolio yields.
On a statutory basis, stand-alone testing of Universal Life products leverages a prescribed interest rate and we expect to increase statutory reserves in the fourth quarter to reflect the decrease in this rate.
Any potential changes to our life assumptions could further negatively impact our statutory results or reduce GAAP earnings in the fourth quarter.
In fixed annuities, adjusted operating earnings of $28 million for the quarter was higher sequentially driven by favorable mortality and the change in reserves related to the increase in interest rates during the quarter.
In the runoff segment, our adjusted operating income was $11 million for the third quarter versus $15 million in the prior quarter and $19 million last year.
Variable annuity performance was driven by equity market performance, which was unfavorable versus the prior quarter and the prior year.
Additionally mortality in the corporate on life insurance products was unfavorable in the current quarter.
We expect capital in Genworth Life Insurance Company, GLIC, as a percentage of company action level RBC to be approximately 290%, up from 272% at the end of the second quarter.
Driving this result is U.S. life statutory earnings, which continue to benefit from higher LTC earnings from the impact of in-forced rate actions, including the benefit from the Choice I legal settlement.
Statutory earnings to LTC are generally higher than GAAP earnings as the concept of profits followed by losses that I discussed earlier does not exist for statutory accounting.
Page 12 of the investor deck highlights recent trends on a quarter lag in statutory performance for the consolidated life companies.
Statutory earnings are also more aligned to taxable earnings, which have resulted in strong cash tax payments to the holding company over the last few quarters.
As Tom noted, with the implementation of LDTI on a U.S. GAAP basis, we plan to highlight the statutory results for our U.S. life insurance business as a part of our quarterly earnings process going forward.
Rounding out the results, adjusted operating income in corporate and other was $1 million and was improved from last quarter in the prior year, driven by lower interest expense and a favorable tax adjustment.
Turning to the holding company, we ended the quarter with a very strong cash position of $638 million with no debt due until our $400 million maturity in August 2023.
As Tom mentioned, we've retired more than $1.5 billion of debt during 2021 while maintaining prudent cash buffers for forward debt service obligations.
This is outstanding progress toward our priority of reducing holding company debt to approximately $1 billion.
Most notably, the net proceeds from the Enact IPO were $529 million, which enabled the full retirement of the AXA promissory note of $296 million.
Intercompany tax payments were $96 million during the quarter and reflected a strong underlying taxable income of Enact and U.S. Life.
Life trends normalize over time we continue to optimize Genworth's group taxable assets and do not anticipate paying federal tax in the near-term.
With our improved liquidity position, we intend to retire our 2023 debt maturity once Enact declares their dividend, moving us $400 million closer to our debt target.
We then anticipate retiring the 2024 debt maturity, leaving an improved debt ladder with the next maturity not until 2034.
In closing, once we've achieved our goal of reducing holding company debt to approximately $1 billion, we'll be positioned to return capital to shareholders.
Dividends from Enact are our main source of cash flow for the foreseeable future and I expect that we'll have a further assessment of future dividend stream in the next several months.
While we that view, we continue to evaluate the optimal approach for shareholder returns.
Our approach will be to find opportunities to return capital to shareholders while still building value over the long term.

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q3 adjusted operating earnings per share $0.46.

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