Genworth Financial, Inc. (GNW) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to Genworth Financial's Second Quarter 2026 Earnings Conference Call. My name is Cynthia, and I will be your coordinator today. [Operator Instructions] As a reminder, the conference is being recorded for replay purposes. I would now like to turn the presentation over to Christine Jewell, Head of Investor Relations. Please proceed.

Thank you, and good morning. Welcome to Genworth's Second Quarter 2026 Earnings Call. The slide presentation that accompanies this call is available on the Investor Relations section of the Genworth website, investor.genworth.com. Our earnings release and financial supplement can also be found there, and we encourage you to review these materials. Speaking today will be Jerome Upton, Interim President and Chief Executive Officer and Chief Financial Officer. Following our prepared remarks, we will open the call for questions. In addition to Jerome, Jamala Arland, President and CEO of our Closed Block Insurance business; Greg Karawan, General Counsel; Kelly Saltzgaber, Chief Investment Officer; Samir Shah, CEO of CareScout; and Angela Simmons, CFO of our Closed Block Insurance business will also be available to take your questions. Together, the leadership team on today's call brings deep institutional knowledge with an average tenure at Genworth of nearly 20 years. During this morning's call, 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. Today'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. Additionally, reference to statutory results are estimates due to the timing of the statutory filings. And now I'll turn the call over to Jerome.

Thank you, Christine, and good morning, everyone. Thank you for taking the time to join our second quarter earnings call. Before turning to our results, I want to acknowledge Tom's leave of absence for medical reasons, which we announced last month. On behalf of the Board and our leadership team, we continue to wish Tom well and appreciate the support that has been shown over the last several weeks. We understand that you may have additional questions, but we ask that you would hold them for now. We will share any material developments, including any time lines as and when appropriate. I have been serving as Interim President and CEO since that announcement while continuing in my role as Chief Financial Officer. Genworth has a deep and experienced leadership team that has been actively engaged with Tom and our Board in the development of our strategy. The Board remains confident in our strategic direction and the ability of our leadership team to execute against our objectives. I am grateful for the support of our Board and leadership team as well as all of our colleagues in Genworth as we focus on advancing our existing strategy and delivering for our policyholders and shareholders. I will now share a brief overview of our second quarter results. Enact once again generated strong shareholder value. We advanced our long-term growth strategy through CareScout, and we further strengthened the self-sustainability of our Closed Block. Genworth reported net income of $47 million or $0.12 per share, with adjusted operating income, excluding the Closed Block of $112 million or $0.29 per share. Our results this quarter were led by continued strong performance from Enact with adjusted operating income of $143 million. Turning to Slide 5. I will highlight our progress against each of Genworth's 3 strategic priorities during the second quarter. First, we continue to create shareholder value through Enact's growing book value and capital returns. Our approximate 81% ownership stake in Enact remains a key source of cash flows to Genworth and helps fuel our disciplined approach to capital allocation. Our balanced capital allocation strategy includes returning capital to shareholders through share repurchases while also investing in our long-term growth opportunities through CareScout. This approach enables us to drive near-term shareholder value while still positioning the company for sustainable long-term growth. During the second quarter, we received $103 million in capital returns from Enact. Supported by the strong cash flows, we continue to execute on our share repurchase program. Since the initial authorization of our buyback program in May of 2022, we have bought back approximately $922 million worth of shares at an average price of $6.48 per share through July 31. We believe these repurchases have created meaningful long-term value for shareholders while allowing us to continue investing in CareScout, which brings me to our next strategic priority. Turning to Slide 6. We continue to drive growth through CareScout, which represents a significant long-term opportunity given the growing demand for aging care, including from 70 million baby boomers now age 62 to 80. We are building a comprehensive aging care platform designed to help people understand, find and fund the quality long-term care they need. We will do this in 3 ways: first, by providing access to a suite of integrated solutions across the aging journey. Second, through expert guidance informed by our data and decades of claims experience. And third, technology-enabled human connection, delivering that expertise through trained advisers who provide personalized local support and helping families navigate what is often a complex, fragmented and emotional process. We are integrating these capabilities across the platform to deliver a seamless experience and build a scalable business for long-term growth. Beginning with CareScout Services on Slide 7. We continue to expand the CareScout network at an impressive pace. In the first quarter, we added our first senior living communities to the network, marking an important step in broadening access beyond home care and expanding options available to consumers in the marketplace. As of the end of the second quarter, the network now includes more than 1,100 home care locations, and we continue to integrate senior living communities, targeting at least 2,000 in the network by the end of this year. Across major markets, the network now includes local advisers, aging care experts who help guide families in their search for high-quality senior living communities. Once engaged, they provide personalized guidance, helping families navigate what can be a complex and important decision. So far this year, we've doubled the number of local advisers with representation in 26 states as of the end of the quarter. Together with our nationwide network of nurses, these local advisers provide families with access to both expert guidance and clinical expertise. As a reminder, our revenue model for senior living communities differs from our home care model with CareScout earning a onetime placement fee upon a successful move-in, consistent with how the broader industry operates. This complements our existing home care preferred pricing model and contributes to a more diversified and scalable stream of revenue. We facilitated approximately 1,450 matches between care seekers and providers in the second quarter, bringing total matches for the first half of the year to approximately 2,950, over double the number of matches achieved in the first half of 2025. Beyond the end of the quarter, matches have been strong and well ahead of matches in the prior year. We've also made strong progress expanding CareScout's match footprint beyond our existing policyholder base, bolstered by senior living matches. As the network continues to scale and brand awareness grows, we expect to drive increased traction across the platform. We also expect a higher share of Genworth's policyholders to utilize network providers and benefit from more efficient care coordination by our team, helping to stretch their benefit dollars further while also generating claim savings for our Closed Block over time. We are continuing to expand our offerings to employers and select affinity groups. This represents an opportunity to introduce more consumers to the CareScout brand, broaden access to our services and generate additional fee-based revenues over time. Turning to CareScout Insurance on Slide 8. We are pleased with the progress we have made towards launching our Care Assurance Worksite product, a version of our inaugural stand-alone long-term care product that will be available through employers. The Worksite product is approved and ready for a third quarter launch in at least 34 states, expanding Care Assurance into an important new distribution channel. We also continue to make progress seeking approvals in additional states. The worksite insurance offering combines long-term care cost protection with immediate access to CareScout's ecosystem of aging care, helping policyholders and their families confidently navigate care needs through care planning, care navigation, caregiver support and the CareScout quality network. This combination is differentiated in the marketplace as it helps customers prepare for their own future care needs while providing immediate resources that can support parents or other family members navigating care decisions today. As with our stand-alone Care Assurance product, the worksite offering is priced and structured for the long term. We remain focused on disciplined growth, appropriate risk management and delivering a strong customer value proposition while driving returns for our shareholders. Our third strategic priority is actively managing our self-sustaining customer-centric Closed Block of LTC, life and annuity products. This business is being managed with a focus on ensuring long-term sustainability, maintaining capital discipline and delivering supportive policyholder experiences. Our multi-year rate action plan or MYRAP remains our most effective lever for maintaining that sustainability. In the second quarter, we secured $46 million of gross incremental premium approvals compared with $41 million in the prior year. We also received an additional $27 million of approvals in July. We continue to work with regulators to finalize pending rate increase request, but the timing of approvals can be difficult to predict. We expect full year 2026 premium approvals and benefit reductions to be broadly in line with 2025 levels, contributing approximately $1 billion of value on a net present value basis. As we enter the later stages of MYRAP, we expect the relative impact of benefit reductions to increase while the relative impact of premium increases declines. This reflects the shrinking runway of future premium from Genworth policyholders as the Closed Block ages. We remain focused on executing this program with discipline to ensure the long-term self-sustainability of the Closed Block. I'd now like to walk through our second quarter financial results in further detail, beginning on Slide 9. Adjusted operating income, excluding the Closed Block, was $112 million, driven by strong performance in Enact, partially offset by a loss in Corporate & Other. As a reminder, results of our Closed Block segment are reported separately in our disclosures. Enact delivered another strong quarter of performance with adjusted operating income of $143 million to Genworth. Results included a pretax reserve release of $37 million, reflective of continued strong cure performance and loss mitigation activities. Results are up versus the prior quarter from seasonally lower losses and the prior year, reflecting higher net investment income, partially offset by the lower reserve release. In Corporate & Other, we reported an adjusted operating loss of $31 million for the quarter, reflecting debt service costs and a growing CareScout business. Our Closed Block segment reported an adjusted operating loss of $110 million. This was driven by liability remeasurement loss related to the actual variances from expected experience or A/E of $127 million pretax, primarily in LTC. Our A/E loss experience in the first half of 2026 has trended above the level implied by our full year expectation of approximately $300 million. While results can vary quarter-to-quarter, if these trends continue, the full year A/E losses could be higher than that level. As a reminder, these GAAP fluctuations do not impact our cash flows, economic value or how we manage the business. Now taking a closer look at Enact's performance beginning on Slide 10. New insurance written of $15 billion in the quarter was seasonally higher than the prior quarter, an increase versus the prior year as a result of a larger estimated market size. Primary insurance in force increased 2% year-over-year to $274 billion, supported by new insurance written and continued elevated persistency. Earned premiums were $245 million in the quarter, up versus the prior quarter and in line with the prior year. As shown on Slide 11, Enact's favorable $37 million pretax reserve release drove a loss ratio of 14%. Enact's estimated PMIERs sufficiency ratio remained strong at 161% or approximately $1.9 billion above requirements. Genworth's share of Enact's book value, including AOCI, was $4.4 billion at the end of the second quarter compared to $4.3 billion at the end of the first quarter. Enact has continued to deliver significant capital returns to Genworth. As I noted earlier, Enact returned $103 million of capital to Genworth during the quarter. Enact's strong balance sheet, disciplined underwriting and financial flexibility position it to navigate a dynamic macroeconomic environment and continue creating shareholder value. Turning to our Closed Block on Slide 12. We continue to proactively manage and reduce LTC risk through prudent in-force management, including benefit reductions and premium rate increases. As of the end of the second quarter, we had achieved an aggregate approximately $34.8 billion of benefit reductions and premium increases on a net present value basis since 2012. As part of our MYRAP, we offer a suite of options to help policyholders manage premium increases while maintaining meaningful coverage. These benefit solutions enable us to reduce our exposure to certain higher cost features such as 5% compound benefit inflation options and large benefit pools. Cumulatively, about 62% of policyholders offered a benefit reduction have elected to take one, lowering our long-term risk. These initiatives have helped reduce our exposure to the riskiest LTC policy features. Notably, our exposure to the 5% compound benefit inflation option has decreased to approximately 35%, down from 57% in 2014 and the percentage of our policies with lifetime benefits has decreased to 11% from 24% in 2014. We remain committed to managing the Closed Block as a closed system, leveraging existing reserves and capital to cover future claims. We will not inject capital into these companies. And given the long-tail nature of our LTC insurance policies with peak claim years still over a decade away, we also do not expect capital returns. Turning to Slide 13. Our investment portfolio remains resilient and is conservatively positioned. The majority of our assets are in investment-grade fixed maturities held to support our long-duration liabilities. New money yields continue to exceed those on sales and maturities with cash in our life insurance companies being invested at yields of approximately 6.2% this quarter. Our alternative assets program is largely comprised of diversified private equity investments and has targeted returns of approximately 12%, although fluctuations from quarter-to-quarter are expected. In the second quarter, realizations rebounded from a slow start to the year and helped drive higher investment income. We remain committed to growing our alternative assets portfolio within regulatory limitations due to its robust track record of returns, diversification benefits and natural fit with long-term liabilities. Next, turning to the holding company on Slide 14. We ended the quarter with $215 million in cash and liquid assets. When evaluating holding company liquidity for capital allocation purposes and calculating the buffer to our debt service target, we excluded approximately $81 million of cash held for future obligations at the end of the quarter, including advance cash payments from our subsidiaries. Our liquidity remains supported by recurring capital returns from Enact and our disciplined approach to capital deployment. Moving to capital allocation on Slide 15. Our priorities remain unchanged. We will continue to invest in long-term growth through CareScout, return cash to shareholders through our share repurchase program when our share price trades below intrinsic value and opportunistically retire debt. During the quarter, we repurchased $62 million of shares at an average price of $8.74 per share and an additional $4 million in July. We also retired $10 million of principal debt in the quarter at a discount, bringing our holding company debt to $768 million. We maintain a disciplined capital structure with a cash interest coverage ratio on debt service of approximately 9x. I will now turn to our outlook for 2026 and provide an update on the guidance we previously shared. On its earnings call this morning, Enact's shared that it now expects to return approximately $550 million to $600 million of capital to its shareholders in 2026. Based on our approximate 81% ownership position, we now expect to receive between $445 million and $485 million from Enact for the full year. Second, we continue to create value for shareholders through our share repurchase program. For the full year 2026, we now expect to allocate between $225 million and $250 million to share repurchases. As we have said before, this range may vary based on market conditions, business performance, holding company cash and our share price. Third, turning to CareScout Services. We remain focused on growing matches toward our previously discussed 2026 target of approximately 7,500 compared with 3,255 in 2025. We continue to make good progress and expect continued growth as we expand the CareScout network, integrate additional senior living communities and increase consumer engagement. However, current match volumes are pacing below the level that would be required to reach the full year target. CareScout Services generated $6 million of revenue in the second quarter, and a total of $12 million during the first half of the year. We continue to expect revenue in this business of $25 million for the full year. We also continue to expect investment of approximately $50 million to $55 million in CareScout Services during 2026. These investments will support the continued expansion of our technology platform, the addition of new products and growth across consumer and B2B channels. We are also deepening carrier partnerships and enhancing operational infrastructure to support higher volumes, recurring revenue and long-term scalability. For CareScout Insurance, we currently do not anticipate any additional capital investment in 2026 following our initial $85 million investment made in 2025 to support the launch of the business. We have made good progress overall with CareScout and remain confident in its continued growth in 2026. As we have noted previously, scaling these businesses and achieving breakeven will take time. I will now provide an update on the AXA litigation. The appeal hearing occurred in July. We continue to expect the Court of Appeal to reach a decision within approximately 3 to 6 months following the hearing. If the judgment is ultimately upheld and all appeals are favorably resolved, we expect to recover a total sum of approximately $750 million, subject to exchange rates at that time. We do not expect to pay taxes on this recovery. As we previously said, recoveries are not factored into our current capital allocation plans. If proceeds are received, we will deploy them in line with our existing priorities: investing in CareScout, returning capital to shareholders and reducing debt. In closing, we are pleased with the progress we made against our priorities and with our financial performance in the second quarter. Enact continues to deliver strong performance and capital returns. CareScout is expanding its network, products and distribution capabilities as we build a comprehensive aging care platform. At the same time, we continue to actively manage our Closed Block and maintain our disciplined and balanced approach to capital allocation. Our focus remains on driving long-term shareholder value through Enact and CareScout, returning capital to shareholders, maintaining financial flexibility and proactively managing our liabilities and risk. I also want to recognize our leadership team and colleagues for their continued focus and execution over the past several weeks. Their commitment to our policyholders, customers and shareholders gives me confidence in our ability to execute against our priorities. Now let's open up the line for questions.

[Operator Instructions] We will take our first question from Ryan Krueger with KBW.

First, I wanted to extend our best wishes to Tom. In terms of our question, I guess, on the AXA/Santander hearing, can you give us just any -- are you able to provide any color on kind of your takeaway and view of how the hearing went in July as it's a bit difficult admittedly to follow it from here sometimes.

So Ryan, first of all, this is Jerome, and thank you for your sentiments expressed to Tom. I am going to ask Greg Karawan, who's here with me to answer your question around AXA and the July appellate court process.