Genworth Financial - Earnings Call - Q3 2020

Transcript

Speaker 0

Good morning, ladies and gentlemen, and welcome to the Genworth Financial's Third Quarter twenty twenty Earnings Conference Call. My name is Jennifer, and I will be your coordinator today. At this time, all participants are in a listen only mode. We will facilitate a question and answer session towards the end of this conference call. As a reminder, the conference is being recorded for replay purposes.

Also, we ask that you refrain from using cell phones, speaker phones or headsets during the Q and A portion of today's call. I would now like to turn the presentation over to Tim Owens, Vice President of Investor Relations. Mr. Owens, you may proceed.

Speaker 1

Good morning, and thank you for joining Genworth's third quarter twenty twenty earnings call. Our speakers are once again remote this morning, so please excuse any sound quality or technical issues that may arise. Our press release and financial supplement were released last night, and this morning, our earnings presentation was posted to our website and will be referenced during our call. We encourage you to review all of these materials. Today, you will hear from our President and Chief Executive Officer, Tom McInerney followed by Dan Sheehan, our Chief Financial Officer and Chief Investment Officer.

Following our prepared comments, we will open up the call for a question and answer period. In addition to our speakers, Kevin Schneider, Chief Operating Officer, will be available to take your questions. During the call this morning, we may make various forward looking statements. Our actual results may differ materially from such statements. We advise you to read the cautionary notes regarding forward looking statements in our earnings release and related presentation as well as the risk factors of our most recent annual report on Form 10 ks that's 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, when we talk about results of our Australia business, please note that all percentage changes exclude the impact of foreign exchange. And finally, references to statutory results are estimates due to the timing of the filing of statutory statements. And now, I'll turn the call over to our President and CEO, Tom McEvoyne.

Speaker 2

Thank you very much, Tim. Good morning, everyone, and thank you for joining our call. First, I'd like to discuss the status of our pending transaction with Oceanwide. Then I'll touch on progress across several Genworth's other strategic priorities and provide a brief overview of our strong third quarter results before turning the call over to Dan Sheehan, Genworth's Chief Financial and Investment Officer. Earlier this week, Genworth announced that Oceanwide had made significant progress towards the Hone Capital funding and other requirements in order to close the Oceanwide transaction.

As indicated in the documentation submitted to Genworth, Hone Capital expects to be able to finalize the $1,800,000,000 financing in November. Oceanwide is also focused on the funds in Mainland China that will provide the remaining amount of capital required to pay for the total purchase price of $5.43 per share so that we can close the transaction by November 30, subject to timely receipt of regulatory approvals and clearances. Additionally, Oceanwide made progress in the China regulatory process submitting updated information and requesting confirmation of the extension of the acceptance of the filing from the Chinese National Development and Reform Commission or NDRC. We are extremely pleased with Oceanwide's progress and update. Genworth's chairman, Jim Reefey, and I have maintained regular communication with chairman Lu and Oceanwide throughout this process, and we will continue to maintain a dialogue with them as they work to complete the remaining steps to close.

We are hopeful that Oceanwide's transaction funding will be completed in time to close the transaction by November 30 without the need for an additional extension. We look forward to providing further updates as we work toward a successful closing of the transaction. In parallel with the transaction process, we have remained focused on executing well and continuing to enhance Genworth's liquidity position in order to meet our ongoing capital obligations. These plans include raising $750,000,000 of debt at the USMI holding company level, which we completed in the third quarter. Certain of those proceeds will be used to address our three thirty eight million dollars of debt maturing in February, which Dan will discuss as part of our overall liquidity position in his remarks.

We also continue to take steps to prepare for a potential IPO of our USMI business. We are making good progress on these efforts and we'll continue to take steps to position ourselves to launch an IPO subject to market conditions if the China Oceanwide transaction is further delayed or terminated. We are also making great progress on our multiyear LTC rate action plan or MYRAP, which remains essential to stabilizing our legacy long term care insurance business. Year to date, we have received approvals on $595,000,000 of annualized in force premiums representing a weighted average premium increase of 29% or $173,000,000 of annual incremental premiums going forward. On a cumulative net present value basis since 2012, Genworth has now achieved approximately $13,500,000,000 of approved LTC premium rate increases.

We are committed to developing industry wide solutions to enhance the vitality of long term care insurance industry through our continued involvement with the NAIC and its long term care insurance executive task force. To this end, an an NAIC subgroup was recently formed to focus on LTC insurance reduced benefit options. We are working to identify options and develop recommendations to provide customers with more choices regarding modifications to their LTC contract benefits where policies are no longer affordable due to rate increases. Before I turn the call over to Dan, I will provide a high level overview of our financial performance for the third quarter. We delivered strong net income of $418,000,000 and adjusted operating income of $132,000,000 led by outstanding performance in our U.

S. Mortgage insurance business. The COVID-nineteen pandemic continues to impact Genworth's businesses in a number of ways. In the third quarter, we saw a sequential improvement in unemployment trends, lower levels of new mortgage delinquencies relative to the second quarter and a robust mortgage origination market, all which benefited the USMI business. Mortality remained elevated relative to the prior year, which had a mixed impact on the LTC and life insurance businesses.

U. S. Mortgage insurance reported adjusted operating income of $141,000,000 compared with an adjusted operating loss of $3,000,000 in the prior quarter and adjusted operating income of $137,000,000 in the prior year. The sequential improvement was driven by lower delinquencies and incurred but not reported or IBNR favorability. USMI achieved $26,600,000,000 in new insurance written during the quarter, up 41% versus the prior year, driven primarily by higher refinance originations and a larger private mortgage insurance market.

At the end of the quarter, USMI's PMIERs sufficiency ratio was 132%, in excess of 1,000,000,000 above the published requirements. Our Australia MI business reported adjusted operating income of 7,000,000 up from $1,000,000 in the prior quarter and down from $12,000,000 in the prior year. Capital levels remain strong with approximately AUD 300,000,000 above management targets. In response to continued uncertainty in the macroeconomic environment, we are preserving capital in Genworth's mortgage insurance subsidiaries, and therefore, we do not expect to receive further dividends from the mortgage insurance businesses in 2020. The amount and timing of dividends in 2021 will depend on a variety of factors, including the timing of economic recovery from COVID-nineteen.

In U. S. Life Insurance, we delivered adjusted operating income of 14,000,000 up from a loss of $5,000,000 in the prior quarter and a loss of $1,000,000 in the prior year. This total included an adjusted operating loss of $69,000,000 in Life Insurance due primarily to higher amortization of deferred acquisition costs versus the prior quarter and year, offset by adjusted operating income of $59,000,000 in long term care insurance and $24,000,000 in fixed annuities. In long term care insurance, we are still seeing higher than normal claim terminations in part due to COVID-nineteen as well as lower incidence of new claims.

We have strengthened our IBNR reserves as result and are continuing to monitor these trends closely. I am proud of the continued strong execution across our teams, all of whom are continuing to deliver excellent service to our customers in a remote work environment. Out of an abundance of caution, we have decided to maintain our office office closures and work from home status until a safe vaccine is widely available to the general public. Based on recent vaccine guidance, we will not open our offices any earlier than 06/01/2021. While uncertainty remains high, we are confident that we're taking the right steps to position our businesses to navigate uncertainty, focusing on the factors we can control, continuing to operate effectively and maintaining strong capital positions in our mortgage insurance businesses.

We will continue to maximize the company's value for our shareholders by taking proactive steps to improve our financial flexibility while working tirelessly towards a successful conclusion of the merger with Oceanwide. With that, I'll now turn the call over to Dan.

Speaker 1

Thanks, Tom, and good morning, everyone. Today, I will cover our financial results for the third quarter, capital positions of our subsidiaries and holding company liquidity. While we continue to face challenges created by the pandemic, I'm pleased with the overall progress made in each of these areas during the quarter with improved earnings, strong capital ratios in our mortgage insurance businesses, and incremental liquidity at the holding company. We reported net income available to Genworth shareholders for the quarter of $418,000,000 and adjusted operating income of $132,000,000 The primary driver of the difference between adjusted operating income and net income was $250,000,000 of net gain from the sale of U. S.

Treasury strips and our life insurance business as we continue to reposition the portfolio at a time when the market value of those securities had appreciated significantly. The US mortgage and housing market has remained resilient through this period of uncertainty with improving home prices, a very large origination market, and moderating delinquencies from their earlier peak. Our USMI business has benefited from its participation in this market, which includes strong underlying mortgage credit quality fundamentals. We're pleased with the performance of the business and the improvement in delinquency and loss trend. USMI's third quarter financial results improved sequentially, primarily driven by lower levels of new delinquencies and incurred but not reported reserve or IBNR favorability.

For the quarter, USMI had adjusted operating income of 141,000,000 and reported a loss ratio of 18%. While new primary delinquencies during the third quarter were still elevated versus pre COVID levels, they were down sixty six percent sequentially with approximately seventy five percent of new primary delinquencies being reported in forbearance plans, which may cure at an elevated rate. Our assumed eventual claim rate or roll rate for the quarter's new delinquencies once again blended a lower expectation of claims for delinquencies currently in forbearance plans with a higher expected claim rate for delinquencies outside of a forbearance plan. We continue to rely on our past hurricane related roll rates, which were materially lower given prior effectiveness of of forbearance and our experience to set forbearance roll rates through the pandemic. In addition to improvement in new delinquencies, USMI released 23,000,000 of the 28,000,000 increase of IBNR reserves that was established in the prior quarter as new delinquency trends improved.

Our servicer reported forbearance trends, which are leading indicator of delinquencies, have declined from peak levels in May and ended the third quarter with 6.7% or 61,200 of our active primary policies reported in a forbearance plan, with 63% of those in forbearance being reported as delinquent. We ended the quarter with 49,700 total primary delinquencies or delinquency rate of five point four percent, both of which decreased sequentially as cures outpaced new delinquencies in the quarter. Primary new insurance written in USMI was 26,600,000,000.0 in the quarter, up 41% versus the prior year, primarily driven by higher refinancing activity and a larger private mortgage insurance market. We estimate our market share will be strong, but down sequentially as our updated view of risk under the prevailing conditions impacted our participation in forward commitment transactions and our decision to adjust our pricing more generally. While our primary insurance in force has grown 15% versus the prior year, lower persistency partially offsets the strong new business levels.

In Australia, the economy continued to recover with stability in the unemployment rate and moderating declines in home prices, although it will be some time before the economy fully recovers to pre COVID levels. During the quarter, the Australian federal government and Australia's large banks extended the home and business loan deferral program, which will allow eligible borrowers additional assistance beyond the original six month forbearance period. Approximately 7% of total Australia households are utilizing these programs, down from 11% last quarter. For Australia MI, approximately 3% of our insured loans or 31,000 loans are currently participating in these forbearance programs, down from over 48,000 loans at 06/30/2020. Under Australia regulatory guidelines, these loans are not reported as delinquent.

The business increased its loss reserves by 18,000,000 US dollars last quarter and 24,000,000 this quarter to account for current macroeconomic conditions, disruption to normal delinquency patterns and uncertainty regarding payment holiday deferrals. Adjusted operating income for Australia for the third quarter was $7,000,000 up from $1,000,000 in the prior quarter and down from $12,000,000 in the prior year. US GAAP loss ratio for the quarter was 37%, which was lower than the prior quarter 63% and slightly higher than the prior year. Low interest rates and gradually improving consumer confidence following the initial COVID nineteen lockdown drove 5,500,000,000.0 of flow NIW, which was up 14% sequentially and 17% versus the prior year. Consistent with prior years, in the fourth quarter of twenty twenty, our mortgage insurance business in Australia is expected to complete annual review of its premium earnings pattern.

In addition, the business will continue to assess the appropriateness of its loss reserves as the pace of the economic recovery and changes to delinquency patterns, including payment holiday deferral become clearer. Turning to US Life, the segment reported adjusted operating income of 14,000,000 for the third quarter. Our US Life businesses continue to experience elevated mortality across all of our products, in part attributable to the COVID nineteen pandemic. We also continue to experience negative impacts on DAC amortization and reserves from our twenty year term and ten year term universal life insurance blocks as they enter their post level premium period. Net investment income for US Life was up sequentially and versus the prior year and included higher limited partnership income as well as favorable inflation adjustments on US treasury inflation protected securities.

In long term care, claim terminations were significantly higher in the third quarter versus the prior year and flat to the prior quarter. Although we do not require death certificates for LTC terminations and cannot make a direct attribution to official causes of death, we do believe some degree of incremental terminations were the result of COVID nineteen, and we continue to monitor these trends closely. Although new claim incurls on choice one and choice two blocks continue to grow as they age, we've experienced favorable development on IBNR claims from lower new claim incidents overall. Since the start of COVID nineteen pandemic, new claim submissions have decreased further, additional favorable IBNR development. However, we do believe that this more recent reduction in incidents is temporary, reflecting delays in reporting claims due to social distancing and shelter in place protocols, and that our incidents experience will ultimately resemble previous trends.

As a result, we further strengthened our IBNR by $24,000,000 in the quarter. The overall IBNR calculation will be reviewed and recalibrated during our fourth quarter assumption review. Shifting to in force rate actions for LTC, the overall benefit was slightly lower than the prior quarter and prior year as illustrated on Page 10 of the investor presentation. While the benefit reductions from in force rate actions remained strong in 2020, they're lower relative to 2019, which benefited from several large state implementations. Our filing activity for new rate actions also accelerated during the third quarter, and we expect that to continue for the remainder of the year.

These filings include newer product series for which we've not requested rate increases in the past. They also include a variety of benefit reduction alternatives, which we've seen more policyholders select. During the quarter, Genworth received approval impacting 338,000,000 of premiums with a weighted average approval rate of 28%. We remain engaged with state regulators on the importance of actuarially justified rate increases. In addition to the approvals we've received so far this year, we're also working on current filings and hope to secure additional significant approvals during the fourth quarter of twenty twenty.

Turning to life insurance. Overall mortality for the quarter was elevated versus the prior quarter and prior year. The third quarter included an estimate of approximately twelve million in COVID nineteen related claims based upon death certificates received to date. Absent the COVID nineteen impacts, mortality would have been flat versus the prior quarter, but modestly higher versus the prior year. The term life insurance business was negatively impacted by shop lapses that continue to be higher than our original locked in assumptions as more of the large twenty year level premium term life insurance business written in the year 2000 entered the post level premium period during the quarter.

Total term life insurance DAC amortization, a noncash impact primarily related to these term life lapses, reduced earnings by $34,000,000 after tax, which is unfavorable compared to the prior quarter. As sales levels declined in the second half of two thousand, we expect amortization related to term policies entering the post level period to begin to decrease in the fourth quarter and into 2021. Going forward, given smaller block sizes and reinsurance agreements in place, we would expect term DAC amortization on policies entering the post level period to be lower than what we observed in 2019 and thus far in 2020. Life insurance results also continue to be negatively impacted by losses in our term universal life insurance product. As a reminder, this is driven by a dynamic of gap reserve build on certain of these policies as they enter their post level premium period without the offsetting premium revenue due to premium grace periods.

Though the impact in the current period was smaller than the prior quarter, we expect this negative dynamic will persist in the 2020 and into the first half of twenty twenty one, after which the number of policies lapsing should exceed the number of policies entering the premium grace ticket. In fixed annuities, lower net spread compared to the prior quarter and prior year pressured earnings, which was mostly offset by higher mortality and single premium immediate annuities. In the Runoff segment, our adjusted operating income was $19,000,000 for the third quarter. The segment benefited from equity market improvement during the quarter, though equity market performance was not as strong as it was in the second quarter. For our U.

S. Life insurance companies, we're in the process of completing our annual review of key actuarial assumptions in the fourth quarter for each of our product lines that we've done in prior years. As with most insurers with long duration products, we're focused on assumptions related to our long term view of interest rates and current portfolio yields, which impact loss recognition and statutory cash flow test. In addition, certain of our universal life insurance products with secondary guarantees require separate testing on a statutory basis using the prescribed reinvestment rate from July to June each year. Given the declining rates during this period, we currently believe that we will likely need to increase statutory reserves by approximately 200,000,000 in 2020, which would equate to roughly a 15 to 20 reduction in risk based capital for Genworth Life Insurance Company or GLIC.

For LTC, we expect to finalize the claims reserve review concurrent with the active life reserve review also in the fourth quarter. While this work is ongoing, current trends do not indicate a need to strengthen the claims reserve as assumptions appear to be holding up in the aggregate. For corporate and other, our adjusted operating loss is 49,000,000 for the third quarter. This loss was higher versus the prior quarter, primarily attributable to tax adjustments. Our approximately 79,000,000,000 cash and investment portfolio continues to perform well given the uncertain macroeconomic environment.

The fixed maturity unrealized gain position continued to improve, reaching $9,200,000,000 at the end of the quarter, reflecting improvements in the credit markets, benign credit migration and minimal impairments. Turning to capital levels. Our U. S. And Australian mortgage insurance businesses maintained strong capital positions at the end of the third quarter.

In USMI, we finished the quarter with a PMIER sufficiency ratio of 132 or approximately $1,100,000,000 above published requirements as of 09/30/2020. The decline in our PMIER sufficiency versus the prior quarter was driven by strong new business levels, partially offset by elevated lapses and the acceleration of the amortization of existing reinsurance transactions. In addition, capital credit from our 02/2019 excess of loss contract decreased as delinquency development has been more favorable than previously expected. These impacts were only partially offset by strong business cash flows. In October, as part of our normal credit risk transfer program, we completed an insurance linked note transaction, which will provide an additional $350,000,000 of PMIERs credit and would result in a PMIERs sufficiency ratio of 147% against published requirements.

The PMIER sufficiency calculation continues to include the effect of the 30% multiplier for eligible delinquencies associated with COVID nineteen. As we noted in the press release, the GSE has recently imposed certain capital restrictions on our USMI business, including the requirement that Gemaco maintain 115% of PMIERs minimum acquired assets, which will remain in effect until certain conditions are met. Our Australia MI business ended the quarter with an estimated prescribed capital amount or PCA ratio of a 179%, which is approximately 300,000,000 Australian dollars above the high end of the management target range of 132 percent to 144%. Post quarter end, the business redeemed the remaining portion of its tier two debt due in 2025, leaving only 190,000,000 Australian dollars outstanding due in 02/1930. We estimate capital in Genworth Life Insurance Company or GLIC as a percentage of company action level RBC to be approximately 240% as of the end of the third quarter, up approximately 15 points from the second quarter.

The improvement was primarily driven by LTC performance and a reduction in reserves on variable annuities related to the continued equity market recovery. For holding company cash, we ended the quarter with $814,000,000 in cash and liquid assets or approximately $450,000,000 above our targeted cash buffer. Approximately $340,000,000 of the holding company cash balance is ring fenced for our February 2021 senior notes maturity, which we plan to pay at that time. Page 16 of the investor presentation provides the quarterly detail, including cash inflows of $436,000,000 from the recent USMI debt issuance and intercompany tax payments of 23,000,000. Cash uses in the quarter include 125,000,000 paid to AXA in July as part of the agreed upon settlement, 59,000,000 for debt service and $18,000,000 for twenty twenty one debt repurchases that were made during open windows during the quarter.

For upcoming holding company debt obligations, we have principal balances of $338,000,000 maturing in February 2021 and $659,000,000 maturing in September 2021. As we noted last quarter, we're not expecting dividends from our mortgage insurance businesses for the rest of 2020 to preserve capital in these subsidiaries, given the uncertainty of COVID-nineteen. To fully address the September 21 maturity, we continue to prepare for an IPO of our USMI business subject to market conditions if the transaction with Oceanwide is further delayed or terminated. Our agreement with Oceanwide affords us flexibility to pursue this or other paths to strengthen our liquidity position. In closing, we've taken numerous steps to improve the liquidity and financial flexibility of our holding company as well as position our business to navigate these uncertain times.

We're pleased with the financial progress and remain focused on providing value to all of our key stakeholders. With that, let's open it up to questions.

Speaker 0

Ladies and gentlemen, we will now begin the Q and A portion of the call. If at any time your question has already been answered or you would like to withdraw your question, please press 2 to be removed from the queue. Please press 1 now. We'll go first to Howard Mills with Deloitte.

Speaker 1

No. I'm sorry. I did not intend to ask a question. Thank you.

Speaker 0

We'll go next to Stan Mercer. Dan, your line is open.

Speaker 2

I did not intend to ask a question. I'm sorry.

Speaker 0

We'll go next to Sean Perkins with Waterfall Asset Management.

Speaker 3

Thanks for having the call, guys. I just wanted to clarify a couple of things related to potential Oceanwide closing and or the potential IPO equity IPO of the USMI subsidiary. Could we walk through the sequencing of those events, if possible at all?

Speaker 2

Sure, Sean. Thanks for the question. So as we disclosed earlier in the week, you know, based on information promotion wide and documentation they submitted to Genworth, we expect that Hone the Hone Capital funding will occur in November, and and they're gathering the funds. I mean, they've obviously, they have a lot of different sources of cash in Mainland China, so they're gathering that to put it in an account. But, you know, they do need approval reapproval, if you will, from the NDRC, and SAFE has to authorize the exchange.

Based, you know, based on everything we know, we're hopeful that we can close by the end of the month with no need for an extension. On the USMI IPO, we're continuing to operate, assuming there isn't a deal closed, obviously, to be to be cautious, although we're cautiously optimistic that we will be able to close the deal. And so we're doing all the steps, you know, the filings that have to be done with the SEC, there's time up periods, etcetera. I think probably a lot on the call are familiar with that. And so our view is that, we would be in a position to, launch an IPO subject to market conditions.

You know, right now, they're pretty positive. And, obviously, the USMI business is doing well, recovering from COVID nineteen. And so our current plans, if there is no deal, would be to launch an IPO sometime in the first half of next year.

Speaker 3

Got it. And and such that they're mutually exclusive, is there any any scenario in which you close China Oceanwide transaction and still move forward with any form of a u IPO USMI?

Speaker 2

What's the other thing? Yeah. That's another good question, Sean. I would say, look. I I think that USMI is a valuable business.

I would say we're disappointed in in the on the management team that the rating agencies don't give us full credit for the terrific performance of our USMI business. I mean, I think the the team there I've been here eight years now almost. The team there has had, I think, awesome results for the last eight years. They continue to do very well on the earnings side. They've got significant excess capital above PMIERs requirements.

So, you know, as Dan mentioned, if you conclude the ILN deal we did in the fourth quarter, we're at a 147%. So I don't know why the USMI ratings aren't higher. Whether we do the deal or not, one of the things that we're working with the rating agencies and to some degree the GSEs on is if we if we did have an IPO, so there's some public flow for USMI, that should be, you know, significant positive for the ratings. I mean, I think the ratings should be higher and more consistent with it with our competitors given the performance of USMI is equal or better than most of our competitors. So that that is you know, it's possible.

It'll be up to the obviously, the new the new board post closing, But there there is a possibility that we would decide to do the IPO anyway if, by doing that, that allows us to get to the ratings that we think we deserve now, if that makes sense.

Speaker 3

Yeah. It does, and and I really appreciate that disclosure. As it relates to the just on the AXA settlement, would there be any proceeds from the China Oceanwide closing that have been earmarked or would be earmarked for any form of payment on the access settlement?

Speaker 2

Another good question, Sean. So in the Oceanwide closing, again, we think that will close by the end of the month. We do provide in in the transaction that there's 1 and a half billion of new capital coming into Genworth apart from the purchase price that you know, the 2,700,000,000.0 that goes to shareholders at $5.43 per share. But the 1 and a half billion, you know, that's gonna come in three tranches of 500,000,000 each. One at the January, one at the April, one at the July.

And so we believe with the 814,000,000 of cash we have on hand, with that 1 and a half billion, you know, potentially an IPO, as we just talked about, Sean, But those the cash of 814,000,000 and 1 and a half, you know, that's 2,300,000,000.0. And so we we think that that is you know, will go towards reducing the liabilities of the 2021 debt, which is around a billion, and then we owe AXA under the the note in two tranches in in twenty twenty twenty two. And then so so that that is the expectation in terms of what proceeds from the further investment by Oceanwide Hollow be used. I I think that and the cash that the there are other possibilities, other investments in the different businesses, but our our main focus will be on using that 1 and a half billion plus cash on hand. And certainly, any dividends we get next year in the future from the the MI subsidiaries to pay off the 2021 debt and retire the AXA liability in 2022.

Speaker 3

Very helpful. Thanks so much.

Speaker 2

You're very welcome, Sean. Thanks for the questions.

Speaker 0

We'll go next to Manuel Garcia with Anchorage.

Speaker 4

Hi, guys. Couple of questions. One, for the the HONI Capital. I think in the past, one of the reasons you described the holdup was that HONI itself isn't providing the 1.8. They were gonna get a bunch of LPs behind them to provide it.

Has that now been received? Do they have all that capital, all the funding for the 1,800,000,000.0 already approved and it's just a matter of getting the regulatory approval?

Speaker 2

Manual, thanks thanks for the question. Yeah. I I would say I think we're in very good shape on the 1,800,000,000.0. I think the Ahony and the partners have been been arranged pretty much. And, you know, the 35% of the funding comes from Mainland China.

Think that's in good shape. You know, obviously, we are dependent on the actual funding of those those together, the 2,700,000,000.0 on the approval of NDRC and then the the SAFE authorization, you know, the window how that that conversion process works. You know, we do think that I mean, obviously, I don't wanna get ahead of the Chinese regulators. That's their decision to make. But, you know, from the beginning, based on a a number of conversations that I've had with the with the chairman Lou is very close to all of them.

You know, we do believe that they continue to support the deal. So it would be, you know, November 5 today, so the next three weeks or so, we we hope those approvals come in from NDRC and SAFE. And then, you know, the money would be wired out of Mainland China, and then Hone Capital would transfer us 1,800,000,000, and then we'd be able to close the deal by the end of the November. That's the plan. Yeah.

Speaker 4

Yeah. Yeah. No. No. I I I don't think the concern has been the regular.

Guess the concern has really been, does Hone have the 1.8? I guess the answer is it does. The answer is yes. Yeah. I I think based on Or not or

Speaker 2

not yet. We've heard Yeah. Based on everything we've heard, we think the Hony Capital 1,800,000,000.0 is in good shape.

Speaker 4

It's in good shape. Okay. Okay. Thank you for that. Second question I had is for the 1,500,000,000.0 of new capital and the three subsequent tranches, you know, is that money already financed and locked in, or is there gonna be a process next year of getting, that capital approved?

Like, what what's the new updated source of that 1,500,000,000.0? And is there any uncertainty of it actually coming into the entity, post, deal closing?

Speaker 2

Again, you know, going back all the way to the beginning of the deal, a significant reason that the generalist regulators are supportive of the deal is because of that 1 and a half billion. So it's a big part of the transaction. And I think all the regulators of Genworth and Genworth itself have done their due diligence on the 1 and a half billion. And so on that, you know, Oceanwide can rely on their total businesses around the world and capital. And so, again, based on the conversations we've had and documentation on the 1 and a half billion, we and the regulators are comfortable that those those 500,000,000 tranches will come in as scheduled.

Speaker 4

Okay. And then, sorry, my final question was, you know, you had some commentary on the USMI business. I think you talked about, you know, losing some market share, though, obviously still being a pretty solid market share. And you talked about being a little more conservative. Did you see pricing weaken this last quarter?

What what made you take a more conservative approach than your competitors?

Speaker 2

Yeah. Well, you know, Manuel, I I would say I I think you gotta be a little careful when you look at quarter to quarter market share because that's gonna be based on a lot of different things. But I I'll ask Kevin Schneider, who's our chief operating officer, to give you a more precise answer in terms of because we we think the NAW is very strong in the quarter, but but Yeah. You know, I think Kevin can give you a little bit more details on how the business saw the opportunities and what we did from a new business perspective. So Kevin, over to you.

Speaker 5

Thanks, Tom. Our market share continually is impacted by the execution of our go to market strategy. And that's including but not limited to our price competitiveness relative to our peers and in particular in the last year in our selective participation in some forward commitment transactions. We do estimate that our share is down from the prior quarter. As Tom mentioned, we regularly market share moves around.

We gain some, we lose some at the customer level on a quarter to basis. But I guess what I would tell you is we pulled back in some price sensitive areas of the market. We didn't do quite as much the forward commitment business. Managing our our new business volumes is is like managing a portfolio. We're always trying to manage the risk and the reward return trade off associated with it.

And with the extensive volume that was available in the market this time, we we chose to to trim back some of that and and think our shares down a little bit. We we feel very good about our share level and the level it'll still come in at. And we think we are, you know, we are poised to continue to drive strong share and perhaps additional share progression going forward. This is a competitive market, and it's always gonna be competitive. And and we we to that with an eye and may maintain the returns we're trying to achieve for our business.

Speaker 4

Well, you know, just just in terms of that point, I totally agree. I think, you know, maintaining market share in a bad environment is not a good idea, so I think that's totally valid. But did you see pricing weaken? Like, if you look at on a like for like basis, is that what made you pull back and say, you know, your program business that you just highlighted? Was it you think are there increasing risks that you see that make you more concerned?

Just trying to get a sense of that point. I I it's not a criticism of lower It's more just trying to understand what did you see that made you, want to pull back a bit as you said.

Speaker 5

No. We we, you know, we had a very strong market share in q two. And and there was I would say there, you know, there was some enhanced pricing competition in in the q three, but nothing really nothing really out of whack. We remain cautious on on this environment and what's gonna happen and play out with COVID overall. You know, we think the credit quality of the business we've been writing has been very strong.

I mean, you compare it to, you know, to the to the last big down cycle, and it's it's it's just a much smaller stronger business volume. So maybe maybe a little bit of of competition, but just all in a day's business in The US mortgage insurance business.

Speaker 2

Yeah. The the only thing I would add, Manuel, if I look at our operating plan for 2020, I can tell you that we we did not expect we'd be writing new NAW more than $25,000,000,000 in any of our quarters this year. So we you go back to the second quarter, it was, over $28,000,000,000, and this quarter over $26,000,000,000 So, it's always hard to know what other competitors are doing, but from my perspective and looking at the goals of USMI, I think they're well above their expectations this year, in terms of NAW being written. And I think it's good execution, I think, by the team. And as they say, you know, they again, we're very disappointed with the ratings.

We think the ratings for USMI are wrong, and we do think that the ratings because we are lower than our competitors, even though we operate as well or better than the competitors, we we think that has, you know, some issue. Despite all that, you know, I I'm extremely pleased with how well, you know, Kevin, Rohit, Gupta, the the the the people running USMI have done. So, you know, we're we're very pleased with the level of NAW. And as Kevin mentioned, the most important thing is we continue to price new business in the mid teens. And so, you know, if you look at a 70 basis point risk free rate, you know, pricing that amount of new business over 25,000,000,000 in the last two quarters of NAW in the mid teens, I think adds a lot of value to the USMI and ultimately to Genworth.

Speaker 0

We'll go next to Jeffrey Dunn with Dowling and Partners.

Speaker 2

Thanks. Good morning. I just wanted

Speaker 1

to follow-up on that MI line of questioning. Is your sense with the market share declined sequentially, is that primarily due to the lost forward commitment contract? Or are you pulling back in other aspects of the traditional flow market?

Speaker 2

I I would say, Jeff,

Speaker 5

that it's I'm I'm sorry, Jeff.

Speaker 2

I was gonna say, Jeff, thanks for the question. I have to go turn it over to Kevin to answer any questions I need to him.

Speaker 5

I I would say, as I mentioned, we we were a little bit more selective in our participation of that business. It was it was conscious, and it's not necessarily that we we lost anything, Jeff, but it that is probably the most price sensitive channel in the market. And so we it was it was at that level and and and not really pressure from the rest of the rest of the market space.

Speaker 1

Okay. And then I think the general consensus back in the second quarter was on average pricing was up 10%, 20% from pre COVID. Do you think that still is generally the case?

Speaker 5

Right. You know, I I think it it overall, that was probably that's probably in the ballpark. We it's probably backed off a little bit, but, Jeff, it's still above the it's still above the level that we as we entered into this period. You know? And it's starting to reflect some of the performance we're seeing as as the forbearance trends come down and as, you know, as as delinquency start to decline and as and and as the cures, you know, are are doing a good job against the new delinquencies.

So, you know, we we see overall a pretty good environment, and it's on a good trend. So I I I think we're we're still up compared to where we started, maybe not the full 20%, but backed off a little bit.

Speaker 1

Okay. And then last question, if Biden ends up winning and pushing through the shift in corporate tax rates, the industry passed on all this tax savings back in the spring of eighteen. What is your sense in terms of pricing power and actually need to increase pricing in that scenario to maintain returns?

Speaker 5

If we are if our returns are impacted negatively from a subsequent change in the tax approach under under a Biden presidency, You know, I I think we'll price in the the cost, you know, our cost, and we'd we'd have to respond and to maintain the existing returns for our customers. So I think I think it it would we we we took advantage of when the tax rate went down. We passed that along to the customers, and, you know, we may have to we may have to push some of that back if taxes go up.

Speaker 4

Okay. Thank you.

Speaker 0

We'll go next to Howard Anster with Anster Trading.

Speaker 6

Congratulations on a great quarter, Tom. I did wanna ask you a question on Axia where you might get some money back from some of the banks that sold the insurance. And I'm wondering how that's going. What's the timeline on that? And the second question is, can you just go over again the increases that you're proposing for the long term care?

Speaker 2

Sure. Thanks, Howard, for both of those questions. Good morning. So on Absa, we made the settlement. As part of the settlement, there are still some invoices coming in from from Absa, and and we we gave the market a view that we thought that would be a little over a £100,000,000 of of new the invoices that we're in, but that will, you know, sort of be passed through.

And I think that's all proceeding pretty much as we expected. You know, as I have said on a number of previous calls, you know, as you know, Howard, I spent eleven years in Europe, so I'm very familiar with all these insurance and banking cases in terms of the misselling and, you know, the the precedent is that in almost all cases in the end, the banking partner, because they did all the selling and the insurers did not, the banking partners were held responsible. And so, you know, my view is that's that's still the case. The bank here is Banco Santander. And, you know, I would think going forward, we ultimately you know, AXA would ultimately be successful in, you know, in pursuing recoveries.

And I'll and as we said, as part of our agreement with AXA, we would we would share to the to the extent we've made we've made payments in that. So, you know, that all has to go through a process, you know, and that's that's really more Axis decision than ours. But but, again, the president would say that at some point in the future, we would get recovery. On the LTC side, we went through the numbers, you know, 595,000,000 of of premiums approval average of 29. I believe that's a 173,000,000.

And on net present value basis, our cumulative is now 13 and a half billion. I I will tell you we have several large states in our LTC premium approval queue, if you will, where we anticipate that we will receive good increases. And and because they're big states, they're more meaningful. It's always a little hard to predict exactly when they'll come in, but, you know, I I do expect, in the fourth quarter, we'll have some some good success. Overall, I'm very, very pleased.

You know, our multiyear rate action plan that we've been working on since 02/2014, we update it every year as assumptions are updated. So we change assumptions, increase assumptions, increase reserves. We're able to more or less offset that with LTC premium increases. And I think that continues to be the case. Would send you know, you know, there's this NAIC long term care task force.

I 44 commissioners, I think, are on that. And, yeah, by and large, I would say that, the NAIC and, almost all the states, you know, strongly support approving these premium increases. It's all in the end, it all goes to pay claims to their policyholders, and that's part of their obligation to make sure those claims are paying. So I think the LTC premium increases continue to go well. They've been going well for the last five or six years, and I think that will continue.

I do think today versus, three or four years ago, it seems like the regulators are more open and willing, because I think they have seen over the last five or six years as all the claims have come in for for the whole industry that, you know, these are actually justified premium increases. And if they're actually justified, their requirement is to is is to grant them. They they spread them out more than I I like I would like. I think that they're doing that to make it easier for our policyholders, which is understandable. But we we are still getting the net present value that we anticipated under the multiyear rate action plan.

I think that's a plus.

Speaker 6

Thank you very much.

Speaker 2

You're welcome, Tom. Thanks.

Speaker 0

Ladies and gentlemen, we have time for one final question coming from Charles Sweth with PolyAgne.

Speaker 7

Thanks. Sorry. Was on mute. Wanted to follow-up on the financing question for the Oceanwide transaction. And, Oceanwide has a pretty, you know, complicated corporate structure.

And one thing I just wanted to clarify since the documents that they provided regarding the financing aren't available is that there appears to be some real estate projects in The United States where Hony Capital is buying assets from Oceanwide. And just want to make sure that the financing for the Genworth transaction isn't subject to those real estate transactions closing because the numbers that we're talking about are pretty similar.

Speaker 2

So Charles, great question. The Honi Capital funds that are looking at the San Francisco property as and then the funds for our deal are totally separate funds of Hony Capital. And and the transaction, you know, it's sort of a bridge loan to to Oceanwide two years provided by the Hony Capital Mezzanine Fund LP, which is a you know, it's a listed fund. And then for the San Francisco property, the there is a Hony Capital real estate fund that is counterparty in that transaction. So, you know, both Hony Capital is a general partner and a limited partner.

These are different funds with different priorities. One is real estate fund and the other is a mezzanine debt fund.

Speaker 1

Great. Thanks.

Speaker 0

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

Speaker 2

Thank you very much, Jennifer. And I also want to thank everybody for joining the call. I also want to thank the questioner the questions. I think all of you asked very good questions that I know a lot of investors are interested in. So thank you for that.

That gave us a chance to, I think, give a little bit more perspective on those. I do want to reiterate that we're very pleased with the progress that Oceanwide is making since the update previous to the one we did on Monday. You know, we they've made great strides in finalizing the financing with Hony Capital as well as from Main Mainland China, and I think they've they're in good shape in all the updating all the necessary filings. Obviously, there's they're waiting for the, you know, final approval or reapproval from NDRC and then the safe actions. But we're hopeful that based on everything we know and the documentations we've received that we can close the transaction by the November.

We still think it's the best value for our shareholders and we are hopeful that we'll be able to close without an additional extension. In the meantime, we're running the company, focusing our strategic priorities within the debt financing that we did, the $750,000,000 at the USMI holding company level. We're full speed ahead on the IPO. And I think if you look at the USMI results, I think they were fantastic in the quarter. Australia had a had a good quarter.

And, you know, we we have the ongoing challenges in the life insurance business because we had a lot of business that was written twenty years ago that's coming through with the end of a level term and the lapse rates are higher than the assumptions made, you know, twenty years ago. So that has an impact on DAC. That's a non cash charge. And Dan gave you a little bit of perspective on that. But despite that, overall for the division, the US Life division, which includes LTC and fixed annuities, think, $59,000,000 and $24,000,000 respectively, it was a good quarter.

So I think particularly if you put it in a and and I would say particularly USMI in the context of we're still challenged as a country and, I guess, as a global economy with COVID nineteen. So, when I look at the third quarter, the $418,000,000 net income and the $132,000,000 of adjusted operating income, I think it's just a very strong quarter. And that bodes well, obviously. I think China Oceanwide, the chairman is encouraged by the quarterly results. And so hopefully, will continue.

Obviously, COVID-nineteen is still a significant issue and we'll see how that plays out. The cases are going up. So it's something obviously to focus on. Again, thanks to everybody for your interest and your support of Genworth and shareholders. And with that, I'll turn the call back over to Jennifer.

Speaker 0

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