Genworth Financial (GNW) Q4 2021 Earnings Call Transcript - Motley Fool

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Genworth Financial (NYSE:GNW)
Q4 2021 Earnings Call
Feb 02, 2022, 9:00 a.m. ET

Contents

Prepared Remarks:

Operator

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 toward the end of this 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 Crews, director of investor relations. Ms. Crews, you may proceed.

Sarah Crews — Director of Investor Relations

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 U.S. 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.

Tom McInerney — President and Chief Executive Officer

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 Genworth’s 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 U.S. GAAP net income for the full year was $904 million.

Adjusted operating income for 2021 was $765 million. Adjusted operating income was $1.48 per share, which is well above analysts’ expectations and our own internal projections. These outstanding results were led by a record year for NAT and adjusted operating income available to Genworth shareholders in 2021 was $520 million. Both U.S.

life and runoff achieved excellent financial results during 2021. Full year adjusted operating income for U.S. life and runoff combined was $321 million, led by strong LTC adjusted operating income of $445 million for the year. Because of the upcoming significant changes to the life insurance industry’s U.S.

GAAP accounting regime based on new long-duration targeted improvement or LDTI rules, Genworth will also be highlighting U.S. life’s statutory results. Additionally, U.S. insurance regulators focused on U.S.

statutory results when assessing the financial condition and performance of life insurers. Therefore, because of the importance that insurance regulators put on statutory accounting and the fact that future statutory results will be based on a consistent methodology, we think that highlighting these results going forward will provide important additional information for shareholders and investment analysts. We have included our statutory information through September 2021 on pages 15 and 16 of the investor deck. While our fourth quarter statutory processes, including cash flow testing, are still in process, we do expect U.S.

life statutory after-tax net income for the full year to be approximately $660 million. The strong net income result was driven by outstanding results for LTC, with pre-tax statutory income of approximately $910 million in 2021. The GLIC consolidated statutory balance sheet was significantly strengthened this year. We expect GLIC’s capital and surplus to increase from $2.1 billion at the end of 2020 to approximately $2.9 billion at year-end 2021.

Similarly, GLIC’s negative unassigned surplus is expected to improve from negative $1.8 billion to approximately negative $1.0 billion at year-end. GLIC’s RBC ratio at year-end 2021 is projected to be approximately 290, an increase of approximately 61 points from 229 at the end of 2020. The significant improvements in the GLIC RBC ratio and statutory balance sheet were driven by excellent statutory net income in 2021, primarily from the strong LTC results. The year-end statutory results in RBC calculations are preliminary as they are still under review and they will be filed with our year-end statutory filings.

I’m very pleased with our strong statutory results for the year. Moving on from our strong 2021 financial results. I want to provide an update on the five strategic priorities we announced last year. The first strategic priority is to maximize the value of our equity position in Enact to benefit Genworth’s shareholders.

Genworth’s board considered several different options for Enact in 2021, including selling 100% of Enact, maintaining 100% ownership before deciding ultimately to move forward with a partial IPO. Our objective has always been to protect and ultimately unlock Enact’s value, enabling us to maximize value for Genworth shareholders over the longer term. The various third-party sale transactions we considered were either not supported by regulators or involves significant regulatory risks, which we would potentially delay the timing of returning cash proceeds to Genworth shareholders. Genworth therefore decided to proceed with a partial IPO and sold approximately 18.4% of Enact shares, which we believe was the best viable option for shareholders.

Genworth’s 81.6% retained interest will allow us to receive significant future cash flows from Enact to enable delevering at Genworth and return of capital to Genworth shareholders. But at the same time, we retain future optionality with our holdings in Enact, including a tax-free spinoff to Genworth’s shareholders, as well as other options. Genworth has decided that retaining our current holdings in Enact for the foreseeable future is the best option. As we achieve our debt target and return capital to Genworth shareholders, we will continue to be open to other options in the future.

In the interim, we believe Enact has various levers to create near and long-term value, and Genworth will continue to advance initiatives that support Enact’s value as the majority owner like debt reduction and other levers to further improve our holding company ratings, which we’ll discuss later. I’m extremely proud of the significant progress achieved in 2021 on our second strategic priority, which is to reduce Genworth’s holding company debt to approximately $1 billion. This has been a long-term objective for the company because this amount of debt is much more appropriate given Genworth’s annual operating cash flows to the parent holding company. We reduced our outstanding debt by approximately $2.1 billion last year, including paying off the AXA promissory note and redeeming the $400 million of parent holding company debt due in 2023.

We now have approximately $1.2 billion of parent holding company debt outstanding. However, because Genworth ended the fourth quarter with cash of $356 million, our net debt position is already below $1 billion. We will look to continue to reduce our debt to meet our target in the near term. Looking at other key indicators of balance sheet strength.

Our U.S. GAAP debt to capital ratio at the end of the year was 13%, one of the lowest among life insurers that report this metric. Looking ahead, we expect Genworth’s interest coverage ratio to improve significantly. After we retire the remaining of Genworth’s $280 million of debt due in 2024, our pro forma cash flow coverage will be approximately five times based on a conservative view of projected future cash flows.

We are hopeful that with a substantial reduction in outstanding parent holding company debt in 2021, our improved cash interest coverage ratio, significant excess cash available to repurchase our outstanding 2024 debt, the long duration of the remaining 2034 and 2066 debt and the expectation of continued strong U.S. statutory net income that the rating agents will continue to upgrade the parent debt ratings over time. The third strategic priority is perhaps the most important priority for the next several years. Since the end of 2012, Genworth has made outstanding progress on moving the legacy LTC portfolio closer to breakeven.

We continue to define our multiyear LTC rate action plan, or MYRAP. During 2021, Genworth delivered a new record for approved LTC rate increases of $403 million from 45 states on 173 separate rate filings. The net present value of the 2021 LTC rate increases was approximately $2.3 billion. During the fourth quarter annual LTC assumption review, we made long-term assumption changes mainly to our benefit utilization trend assumptions based on cost of care growth.

2021 margins reflect the updated unfavorable benefit utilization trend assumptions fully offset by higher model future in-force rate actions. Our 2021 LTC margins remain positive, in the $0.5 million to 1 — $0.5 billion to $1 billion range, and the assumption update did not cause a financial statement impact in the quarter. Dan will review the assumption changes in more detail during his remarks. We have the strongest and most experienced LTC premium increase team in the industry, led by Jamala Arland.

Jamala Arland and her team are continuously improving the LTC projection models to capture more accurate data and determine the level of actuarial active premium increases to request. Regulators have a high regard of Genworth’s LTC projection models, which have made the premium approval process more efficient. These models have also helped us update the level of net present value, or NPV, from prior approved premium increases and benefit reductions given our new cost of care assumptions. In addition to the approximately $2.3 billion NPV benefit from the $403 million of approved increases in 2021, the models project based on the latest assumption changes that the NPV achieved since 2012 has improved by an additional $2.8 billion compared to our earlier projections.

As of the end of 2021, Genworth now projects that the LTC premium increases and benefit reductions achieved since 2012 have improved the legacy LTC portfolio by $19.6 billion on a net present value basis. This is a $5.1 billion increase from the $14.5 billion that reported at the end of 2020. I am incredibly proud of the progress we’ve made toward stabilizing the legacy LTC book through our holistic approach, and I look forward to sharing further updates in the future. The four strategic priority is advancing Genworth’s LTC growth initiatives.

This is an important long-term priority because we believe that Genworth can only stand on its own without ongoing support from Enact dividends if we bring the legacy LTC portfolio closer to breakeven and develop a viable growth strategy that Genworth investors believe is sustainable. If we can achieve both objectives, it would facilitate the future spinoff of Genworth’s 81.6% of Enact because the remaining Genworth business would be viable as a stand-alone public company. To support our growth strategy, we are in the process of standing up a new business line, Global Care Solutions. And we have hired Joost Heideman as CEO to lead Genworth’s LTC growth initiatives that will be developed within the new business line.

Joost has approximately 30 years of experience in the insurance industry. He has worked for both large global insurers and for venture capital has focused on new health insurance models in emerging markets. Joost worked with me at ING Group for over a decade, including stints helping me oversee ING’s worldwide insurance and investment management businesses in over 40 countries and restructuring ING’s very large side agency distribution channels in the emerging markets in Asia, Latin America and Eastern Europe. After leaving ING in 2014, Jos was chairman and CEO of Unive, a mutual life and health insurer in the Netherlands.

He was working with Dutch venture capitalist to develop a new digital health insurance venture in East Africa in 2020 until the COVID-19 pandemic halted that venture. I’m very pleased we were able to recruit Joost in 2020 as an outside consultant to help us develop our LTC growth strategies and that he will now be overseeing the implementation of those strategies as the CEO of global care solutions. Because of the geopolitical challenges between China and the U.S., we have reduced our focus on China opportunities until those issues become more transparent. We have redirected our focus on two new U.S.

LTC businesses as part of our new global care solutions. The first business will offer fee-based advice consulting and services in the aged care space. We see meaningful opportunities to provide advice, consulting and services to address the needs of elderly Americans, their caregivers and their families. Genworth’s CareScout subsidiary, led by Ed Motherway, currently provides some of these services.

Acquired by Genworth in 2008, CareScout is a market leader in providing LTC care assessments and care support through our network of 35,000 clinicians nationwide. Joost and Ed will work together to further develop the long-term opportunities for CareScout. Genworth has not funded CareScout over the last five years as our focus had been directed toward seeking premium increases on our legacy LTC portfolio. We see tremendous potential in the business as part of our LTC growth strategy, so we are making an investment of approximately $8 million in CareScout in the first quarter to expand its clinical assessment capabilities in care support solutions.

This investment will allow CareScout to extend their assessment services to help support the many healthcare organizations that are experiencing a high volume of patients, ongoing assessment staffing shortages and numerous work for disruptions due to the COVID-19 pandemic. We expect this investment to triple the annual assessment revenues in the next few years to approximately $30 million. Longer term, CareScout and its future service affiliates are expected to provide a diversified source of capital-light fee-based revenues as we deploy new capabilities and solutions to meet the needs of a growing marketplace. We have several significant elder care capabilities and experience that other competitors do not have, including 40-plus years of experience in the LTC insurance business, data on 330,000 LTC claims paid to date to legacy LTC policyholders, existing relationships with a network of 35,000 care assessment professionals, who are mostly registered nurses, and existing relationships with 90,000 providers and caregivers throughout the U.S.

Our CareScout and other service strategies are based on converting these considerable capabilities into a viable and scalable advice, consulting and service businesses for the elderly and their families. The second LTC growth business strategy is based on transforming the existing LTC insurance market. The new Genworth LTC products to be sold in the market will be designed to solve the myriad of issues that have plagued the legacy LTC insurance business. The most important change is to transform the LT insurance market is to implement an annual rerating model.

Genworth believes the primary problems with all insurers’ legacy LTC insurance products were caused by the level premium regulatory model. Legacy LTC products were sold pursuant to a regulatory regime designed to make premium adjustments difficult to obtain even though it is impossible to price products with assumptions that will hold, and of course, they did not hold for 30 to 40 years. We are in the process of finalizing Genworth’s first new LTC individual insurance product. The new product is priced for a mid-teen return using pricing assumptions that we believe are conservative.

The product has a maximum lifetime benefit of $250,000, and the pricing assumptions for the key LTC risk were interest rates, lapses, morbidity and mortality are based on Genworth’s current experience and projections for these factors. However, because we understand that these pricing assumptions may not hold over the next 30 to 40 years, we will only write new business in states that will allow annual rerating to change premiums if pricing assumptions and market reality differ over time. We have had extensive discussions with regulators, and we believe enough regulators support the concept of annual rerating to move forward with the product. However, because of regulatory issues with the need for large premium increases on Genworth’s legacy books and the need for many states to change to their current rate stabilization rules, some of which require legislative action, we do not expect to be able to launch the new LTC product in most states right away.

We may, however, decide to accelerate the launch with a handful of states who seem enthusiastic about bringing a new innovative LTC product into their state’s insurance market. I believe that these innovative forward-thinking states can help rebuild a robust long-term care insurance market that contributes to solving the massive long-term care funding crisis based in the country and that is at the core of Genworth’s multifaceted growth initiatives. Genworth’s current financial strength and ratings are also an issue for the viability of the new LTC product. As a result, last year, we have been working with a third-party reinsurer with an A+ rating from A.M.

Best. We have a new Genworth insurance company, which will only write new business and will not have any legacy LTC business. We expect that 75% of the risk with a new LTC product will be reinsured with the A+ rated reinsurer, though the level of reinsurance that we expect to be reduced to 50% over time. Preliminary discussions with AM Best have provided a good understanding of their methodology around investment-grade ratings.

Genworth expects to offer several additional new and innovative LTC products, including hybrid products and a nonguaranteed LTC benefit product in the future. Genworth’s fifth strategic priority is returning capital to our shareholders. Given that our net debt position is now below $1 billion, and we expect Enact to share their dividend policy later this year, we plan to consider initiating a capital management program later in 2022. We’ll have an update on Genworth’s capital management plans on the next earnings call.

In closing, I’m very pleased with the strong operating performance and the progress on our strategic priorities achieved in 2021. We have made outstanding progress on Genworth’s turnaround, and I remain confident in our plans to drive shareholder value. And with that, I’ll turn the call over to Dan to discuss our fourth quarter results and financial position in more detail.

Dan Sheehan — Chief Financial Officer and Chief Investment Officer

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 provided 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 quarter. Subsequent to the quarter, in January, Enact executed an excess of loss reinsurance transaction, which will cover the 2022 production and is expected to provide approximately $300 million in PMIERs credit. Reinsurance transactions are a key part of their credit risk transfer program that is designed to provide cost-effective capital relief and reduce loss volatility.

We’re very pleased with Enact’s performance for the full year and the fourth quarter, which included the payment of its first dividend as a public company. The $1.23 per share dividend generated $163 million for Genworth. With respect to our expectations for future dividends from Enact, Enact is evaluating its dividend policy and expects to initiate a regular common dividend around mid-2022. Turning to the U.S.

life insurance segment. We reported $41 million of adjusted operating income in the quarter, driven by the continued strength of LTC earnings from the multiyear rate action plan and variable investment income. Mortality continued to be elevated in the quarter, in part from COVID-19, which benefited LTC earnings but negatively impacted our life insurance results. Results in the quarter also included charges in our term universal life and universal life insurance products of $102 million related to assumption updates and DAC recoverability testing.

In our long-term care insurance business, we reported strong results with fourth quarter adjusted operating income of $119 million compared to $133 million reported in the prior quarter and $129 million in the prior year. As we discussed last quarter, while our overall GAAP margins are positive, we’ve established a GAAP-only profits followed by losses reserve, which covers projected losses in the future. This reserve reduced LTC earnings by $121 million after tax during the quarter. As of year-end, the pre-tax balance of the profits followed by losses reserve was $1.3 billion, up from $625 million at year-end 2020.

Our fourth quarter adjusted operating earnings from in-force rate actions were $296 million after tax and before applying profits followed by losses, which increased from $225 million in the fourth quarter of 2020. Page 12 of the investor presentation illustrates the strong full year earnings trends from our in-force rate actions and a $1.2 billion benefit in 2021. The legal settlement on our LTC choice one policy forms continued to favorably impact our results by $57 million or $14 million after profits followed by losses this quarter. The choice one legal settlement applies to approximately 20% of our LTC policyholders.

As of quarter end, approximately 65% of the settlement class had reached the end of this election period. We currently expect the remaining class members to make their elections over the course of this year. There are two other similar legal settlements pending. The one for our PCS 1 and PCS 2 policy forms comprises approximately 15% of our LTC policyholders and is subject to final court approval.

Should the settlement be approved in the near term, we expect claimants to start making their elections in mid to late 2022. Additionally, we’ve reached an agreement in principle for a settlement on our choice two policy forms, which covers approximately 35% of our LTC policyholders or as many policies as the two other settlements combined. The choice two settlement is still subject to the execution of a formal agreement in the court schedule and ultimate approval. Subject to these events, we anticipate that we’ll begin implementing an approved settlement by early 2023.

While our financial results in 2021 have been favorably impacted by the choice one legal settlement and the other two settlements are expected to positively impact future financial results, it’s difficult to quantify their overall impact on our financials as full implementation will take several years that is subject to specific policyholder elections. In terms of LTC invoice rate action approvals, it was a record year for Genworth due in part to regulators’ recognition of the importance of actuarially justified rate increases for Genworth and the industry. During the quarter, we received approvals impacting approximately $223 million of premiums with a weighted average approval rate of 36%. On a year-to-date basis, we received approvals impacting nearly $1.1 billion in premiums with a weighted average approval rate of 37%.

This is favorable compared to the prior year when we received approvals impacting $1 billion in premiums with a weighted average approval rate of 34%. We experienced favorable variable investment income at LTC again this quarter, reflecting higher limited partnership income, gains on treasury inflation-protected securities, bond calls and mortgage prepayments. While we saw a very strong variable net investment income in 2021, which is not subject to reductions from profits followed by losses, we do expect this investment performance to moderate over time. Claim terminations in the fourth quarter were higher versus the prior quarter and lower versus the prior year, as noted on page eight.

We made a minimal adjustment to our previously established COVID-19 mortality reserve for the quarter, decreasing the cumulative balance to $134 million. As the pandemic continues, mortality experience may fluctuate, and the COVID-19 mortality adjustment would be reduced if mortality experience becomes unfavorable. Turning to page 11 of the investor presentation. New active claims are higher than the prior year, but new claims incidence experience remains lower than pre-pandemic levels and continues to drive favorable incurred but not reported, or IBNR, claim reserve development.

In the fourth quarter, given the gradual increase in incidents, we reduced our COVID-19 IBNR claim reserve by $34 million, resulting in a cumulative balance of $75 million. We completed our annual review of key actuarial assumptions in each of our product lines during the fourth quarter. Our assumptions for LTC claim reserves or disabled life reserves held up in the aggregate and the margin for policies not yet on claim included in our active life reserves remains positive. Therefore, we did not increase our reserves and there was no P&L impact from these updates.

Please note that the COVID-19 pandemic impact to the businesses were not considered when reviewing our long-term assumptions as they are not currently expected to be indicative of future trends or loss performance. As part of the LTC active life margin testing process, we reviewed our long-term assumptions relative to experience. During this year’s assessment, we updated several assumptions with respect to lapses, mortality, expenses, interest rates, and most significantly, benefit utilization trends. Margin testing results for the LTC block are shown on page nine.

These results remain positive in both the historical and acquired blocks. The combined margin was approximately $500 million to $1 billion, which is consistent with the prior year’s range. As Tom outlined, given the expected future increase in the cost of care, we expect our long-term benefit utilization to trend higher than previously assumed. This is one of our key long-term assumptions that impacts trends modeled over a 60-year period.

Prior to this update, we had assumed that the long-term benefit utilization would improve over time. Based on our experience, it has not improved as much as we predicted, largely due to the cost of care growth driven both by broad-based inflation and minimum wage increases in some large states, among other factors. Therefore, we’ve increased the outlook for our future benefit utilization trend. Since margin testing remained positive, we’re not required to increase our LTC active life reserves for policies not yet on claim as the model benefit from adjustments to our multiyear rate action plan offsets the approximately $4 billion impact from the assumption updates.

I’m pleased that our progress on the multiyear rate action plan and other risk mitigation actions, combined with future actions, have allowed us to absorb these assumption updates without incurring any charges in our financial results. A multiyear rate action plan is essential to our strategy of proactively managing and mitigating adverse emerging experience. And with this updated trend assumption, it further emphasizes the ongoing need for rate actions. The success of the multiyear rate action plan has strengthened our ability to pay claims in two ways.

First, there is the increased premium revenue. Second, in connection with approved rate actions and the legal settlements, we’ve managed our long-term exposure to generous product features, like lifetime benefits and compound inflation riders, as policyholders have elected benefit reductions to mitigate rate increases. As evidenced on page 13, 44% of policyholders have selected reduced benefit or non-forfeiture options, which reduces our long-term risk. Our peak claim mirrors are over a decade away, and as always, we’ll continue to monitor emerging experience to help evaluate the need for future changes.

We now project the need in aggregate for approximately $28.7 billion in LTC premium increases and benefit reductions on a net present value basis, which is important in our progress toward achieving economic breakeven on our legacy LTC block. While this amount has increased as a result of the assumption update, we are over two-thirds of the way there, having achieved $19.6 billion in rate actions since 2012. The $19.6 billion we’ve achieved has grown significantly since last year, in part because of the value of our 2021 rate action approvals of $2.3 billion. Additionally, the benefit utilization trend assumption update for higher cost of care growth increased the value of our previously achieved rate actions by $2.8 billion.

The remaining amount we have left to achieve is $9 billion, which has grown from last year, largely to offset the unfavorable impact from the assumption updates. Based on our proven track record and the strength of the multiyear rate action team and their process, our ability to close the remaining amount is achievable. As I’ve shared before, we’re managing the U.S. life insurance companies on a stand-alone basis.

Through capital and surplus, rate increases and reduced benefit options, we’re working to ensure our ability to pay LTC benefits over the long term. Turning to our life insurance products. We reported a fourth quarter adjusted operating loss of $98 million compared to operating losses of $68 million in the prior quarter and $20 million in the prior year. Overall mortality for the fourth quarter continued to be elevated versus expectations, though improved versus the prior quarter and prior year.

The fourth quarter included approximately $27 million after tax and COVID-19 claims based upon death certificates received to date. As part of our annual assumption review, we made assumption updates on the term universal and universal life products as well for both mortality and interest rates, which resulted in a combined unfavorable impact of $70 million in the fourth quarter. In our universal life products, we recorded a $32 million after-tax charge for DAC coverability testing compared to $30 million in the prior quarter and $50 million in the prior year. These charges continue to reflect unfavorable mortality experience and block runoff.

In fixed annuities, adjusted operating earnings of $20 million for the quarter included the benefit from favorable mortality in the single premium immediate annuity products. In the runoff segment, our adjusted operating income was $16 million for the fourth quarter compared to $11 million in the prior quarter and $13 million in the prior year. Variable annuity performance was driven by equity market performance, which was favorable versus the prior quarter though less favorable than the prior year. For the U.S.

life insurance company, statutory financials and cash flow testing results remain in process and will be made available with our year-end statutory filings. We expect consolidated capital in Genworth Life Insurance Company, or GLIC, as a percentage of RBC to be approximately 290% at December 31, in line with the 291% at September 30. This is due in part to the expected negative impacts of the life assumption updates and cash flow testing offset by the $170 million statutory capital benefit from the life block reinsurance transaction completed in the quarter. RBC is significantly higher than the 229% at December 31, 2020, due primarily to the favorable LTC statutory earnings in the year.

This increase was driven by the benefit from in-force rate actions, including the impacts from the choice one legal settlement, favorable investment performance and favorable terminations. We expect GLIC consolidated year-end capital in surplus to be close to $3 billion as we’ve seen a strong trend throughout the year. Pages 15 and 16 highlight recent trends in statutory performance for LTC and GLIC consolidated on a quarter-lag basis due to the timing of when statutory results are finalized. Statutory earnings for LTC are generally higher than GAAP earnings as the concept of profits followed by losses that I discussed earlier does not exist under statutory accounting.

Statutory earnings are also aligned to taxable earnings, which have resulted in strong cash tax payments to the parent holding company throughout 2021. Rounding out our results, we reported an adjusted operating loss in the corporate and other segment of $18 million, which was an improvement of $31 million from the prior year, reflecting lower interest expense given the reduction of holding company debt, as well as lower corporate expenses. Turning to the holding company. We ended the quarter with $356 million of cash and liquid assets.

Page 17 provides a detailed cash activity for the quarter. Key items in the quarter included the debt reduction of $518 million of principal, the dividend from Enact of $163 million, and $75 million in the intercompany cash tax payments, reflecting strong underlying taxable income from Enact and the U.S. life insurance business. The holding company received $370 million in cash taxes in 2021.

We will continue to utilize holding company tax assets in 2022 and anticipate that the holding company will receive approximately $200 million in cash taxes in 2022, subject to ultimate taxable income generated. Given our current tax position, we do not anticipate paying federal taxes in the near term. In closing, when I think about where we started 2021, I’m incredibly proud of our financial results and the progress we’ve made against our strategic priorities. For the full year 2021, net income was very strong at $904 million versus $178 million in 2020, and adjusted operating income was $765 million versus $310 million in 2020.

Enact contributed $520 million in adjusted operating earnings to Genworth in 2021, and we’re very pleased with LTC’s $445 million in adjusted operating earnings. While statutory results are still in progress, we estimate full year after-tax statutory net income for the U.S. life insurance business of $660 million, driven by LTC’s estimated $910 million of pre-tax statutory income. Throughout 2021, we improved our financial strength and flexibility each quarter, putting up strong operating results, driving efficiencies to reduce our annual run rate expenses by approximately $75 million, maximizing the value of our assets and reducing our debt and overall cost of capital.

With the completion of the Enact IPO, we achieved rating upgrades from Moody’s and S&P at the parent holding company in recognition of the improved credit risk profile and increased financial flexibility. Enact was also upgraded by Moody’s, S&P and Fitch, which has enabled it to expand its customer base and be more competitive against peers. In 2021, we took a proactive approach to managing our holding company debt, which has strengthened our balance sheet as we head into 2022. We retired over $2 billion in debt, including the AXA promissory note and of approximately $1.2 billion of parent holding company debt remaining as of year-end.

We plan to retire the remaining 2024 debt of $282 million ahead of its maturity date. After we retire the 2024 debt, our next debt maturity will be more than a decade away in 2034, and we would expect cash interest coverage to be approximately five times based on a conservative view of projected cash flows, which will be great progress. While it has been over 13 years since Genworth returned capital to shareholders, we plan on announcing more specific capital management plans later this year given the tremendous improvement in our financial condition achieved in 2021. The timing is dependent on redeeming the remaining $282 million of debt due in 2024 and Enact’s announcement of its future dividend policy.

The bottom line is that we’ve had a terrific year and are entering 2022 with a strong foundation and a clear path for the future. We look forward to sharing more with you soon. Now, let’s open the line for questions.

Questions & Answers:

Operator

[Operator instructions] And we’ll go first to Ryan Krueger with KBW.

Ryan Krueger — KBW — Analyst

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.

Tom McInerney — President and Chief Executive Officer

Dan, do you want to cover that?

Dan Sheehan — Chief Financial Officer and Chief Investment Officer

Yeah. Thanks, Tom. So Ryan, if you look at page nine 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.

Ryan Krueger — KBW — Analyst

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?

Tom McInerney — President and Chief Executive Officer

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.

Ryan Krueger — KBW — Analyst

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?

Tom McInerney — President and Chief Executive Officer

You know, Ryan, we’ll evaluate that. But I think, you know, 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.

Ryan Krueger — KBW — Analyst

Understood. Thanks for the answers.

Tom McInerney — President and Chief Executive Officer

Thanks, Ryan.

Operator

We’ll go next to Joshua Esterov with CreditSights.

Joshua Esterov — CreditSights — Analyst

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.

Tom McInerney — President and Chief Executive Officer

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.

Joshua Esterov — CreditSights — Analyst

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?

Tom McInerney — President and Chief Executive Officer

Yeah. I would — good questions, Josh. I would say on the variable annuity, it’s been a runoff 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 U.S. 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 with the earnings that come with it? Or is 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.

Joshua Esterov — CreditSights — Analyst

Understood. Appreciate that. And then, separately, obviously, you’ve done a fantastic job of reducing the overall parent company debt burden. And 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, so 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?

Tom McInerney — President and Chief Executive Officer

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 24s that are outstanding. That’s a huge thing when we get there because that would mean the remaining debt is $900 million.

The 34s and the 66s, the interest expense is $35 million to $40 million. So we got our interest coverage ratio when 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 66, yes, they’re trading below 100. But as most companies, when they have these hybrid securities and you have senior securities like the ’34s ahead of it, we would have — before we could repurchase the ’66, we’d have to take the ’34s out. And there are pluses and minuses to that. So I think where we are is we’ll definitely take the 24s 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 — I’m sorry, if you knew 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 24s and just how you and your team look at the outstanding debt and the trading opportunities with ours?

Dan Sheehan — Chief Financial Officer and Chief Investment Officer

Yeah. Thanks, Tom. So I’ll back into this a little bit. We ended the year at $356 million of past, which is in excess of the amount we have remaining on the 2024s at 280.

Once we pay off the 24s, 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.

Joshua Esterov — CreditSights — Analyst

Thank you both. Appreciate all the feedback.

Tom McInerney — President and Chief Executive Officer

Thank you, Josh.

Operator

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

Ryan Gilbert — BTIG — Analyst

Hi. Thanks very much. Good morning, everyone. First question’s on holding company cash in ’22 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 ’22. Is there any way you can quantify sources and uses for the other line items over the year?

Tom McInerney — President and Chief Executive Officer

I’ll let you handle that one, Dan.

Dan Sheehan — Chief Financial Officer and Chief Investment Officer

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.

Ryan Gilbert — BTIG — Analyst

OK. Got it. 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.

Tom McInerney — President and Chief Executive Officer

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 U.S. 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 rate is 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 U.S. 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 midyear. 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 advisors thinking all through that. And we’ll have more to say on our first quarter call in May.

Ryan Gilbert — BTIG — Analyst

OK. 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.

Tom McInerney — President and Chief Executive Officer

Yeah. 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 one and choice two. And together, there are about 650,000 policies. So that’s about 65%. And the average age for choice one rounded to 75.

For choice two, 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 one, it’s five to 10 years before those policyholders really get to their pre-claim years. There are some claims — and you can see it again on that page 14. And for choice two, 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 Jamala Arland 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 to $9 billion. Dan went through the numbers, but we’ve gotten $20 billion with $5.1 billion in 2021 alone. But those — the changes in the assumptions and if you — again, on the bottom of page 14, you’ll see the average approval on choice one, choice two. I think choice one is unlimited.

It’s 185%. choice two is 125%. And that’s less than what we got on the older blocks. So most of the $9 billion is going to ultimately be on the choice one and choice two.

And one, there’s a longer premium runway because the policyholders will be paying premiums longer. And we’re going to be getting the premium increases well before we get to the peak claim here. So again, I feel very comfortable we have significant time, many years, to work with regulators to get those premium increases. So that’s why we feel very good about where we are given the tremendous progress the last three years.

This year was a record. I think we’ve got off to a pretty good start in 2022. We did a lot of filings for approved increases last year. So I just think if you look at our three-year track record, it’s extremely strong and it’s much better than if you looked at three years before that.

And I think that will continue. So we’re confident that we’re going to close the gap.

Ryan Gilbert — BTIG — Analyst

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

Tom McInerney — President and Chief Executive Officer

Thank you, Ryan.

Operator

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

Tom McInerney — President and Chief Executive Officer

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 in 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.

Operator

[Operator signoff]

Duration: 68 minutes

Call participants:

Sarah Crews — Director of Investor Relations

Tom McInerney — President and Chief Executive Officer

Dan Sheehan — Chief Financial Officer and Chief Investment Officer

Ryan Krueger — KBW — Analyst

Joshua Esterov — CreditSights — Analyst

Ryan Gilbert — BTIG — Analyst

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