Genworth Financial - Earnings Call - Q4 2019

Transcript

Speaker 0

Good morning ladies and gentlemen and welcome to Genworth Financial's Fourth Quarter twenty nineteen Earnings Conference Call. My name is Derek and I will be your coordinator today. At this time, participants are in 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.

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

Thank you, operator. Good morning, everyone, and thank you for joining Genworth's fourth quarter twenty nineteen earnings call. 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 Kelly Grow, our Chief Financial 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 and Dan Sheehan, Chief Investment 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 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, when we talk about our 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 the statutory results. And now I'll turn the call over to our CEO, Tom McInerney.

Speaker 2

Good morning and thank you for joining today's call. Today, I will focus my remarks on the status of our pending transaction with Oceanwide. As we have previously discussed, including during the December 1239, Genworth Annual Shareholders Meeting, after the successful closing of the sale of the company's interest in Genworth Canada for approximately $1,800,000,000 the two key remaining Genworth approvals for the China Oceanwide transaction are from the GSEs and the New York regulator, the New York Department of Financial Services. These regulators had previously approved the Oceanwide transaction, but because of the transaction closing delay, given the time it took to complete the Genworth Canada sale, their respective approvals expired. The GSEs and FHFA, their regulator, have reapproved the transaction, leaving New York's approval as the most significant remaining Genworth approval.

Genworth and New York have been engaged for months in discussions regarding the fourth quarter twenty nineteen assumption review for Genworth Life Insurance Company of New York or Gluttony and the reapproval of the transaction. As part of the discussion process, New York has recently told China Oceanwide and Genworth that the re approval would be conditioned on a capital contribution by Genworth Financial to Gluttony. The parties may or may not be able to reach a mutually acceptable compromise and any capital contribution to GLICNY would require Oceanwide's consent under the merger agreement. Genworth shareholders and other stakeholders are well aware of the many concessions China Oceanwide and Genworth have made to various Genworth regulators since the transaction was announced three plus years ago. These concessions and the willingness of China Oceanwide and Genworth to continue this process for more than three years make it very clear how committed we both are to the transaction.

As we have said many times, the Genworth Board and I believe the transaction is the best and most certain strategic alternative for Genworth shareholders. It's also the best option for other stakeholders, including our policyholders, employees and the communities we serve. Because of the comprehensive benefits of the transaction to our respective shareholders and all stakeholders, China Oceanwide and Genworth have been willing to consider transaction changes and regulatory accommodations to move the transaction forward. China Oceanwide and Genworth are acutely aware of the careful balance we need to strike to accommodate each regulator while also making the overall transaction fair and acceptable to all regulators and the stakeholders they represent. In the case of the key state insurance regulators that must formally approve the transaction, their primary criterion is whether or not the transaction is in the best interest of their respective policyholders.

They do not consider the interests of shareholders and bondholders. We have six state insurance regulators who must approve the transaction. We have approvals from five of the six state insurance departments. I would note that China Oceana and Genworth are in the process of providing some regulators additional information so they can confirm their approvals. The Delaware Department of Insurance is the key regulator for Genworth Life Insurance Company or GLIC.

GLIC is the Genworth Life subsidiary that is the insurer of over 1,000,000 LTC policies across 49 states and the District Of Columbia. By contrast, GLICNY has approximately 76,000 LTC policies outstanding to New York policyholders. As part of the December 2018 approval process with Delaware, China Oceanwide and Genworth agreed to contribute 175,000,000 of capital to GLIC upon the closing of the transaction. I want to remind everyone listening on the call that we believe the policyholders of GLICNY and GLIC are clearly benefited by the Oceanwide transaction. Regardless of the capital amount agreed upon with the respective regulators, Genworth's capital contributions to either GLICNY or GLIC are only being contemplated because of the $1,500,000,000 of additional capital China Oceanwide is contributing to Genworth.

Genworth is not going to make a contribution to either subsidiary in the absence of the transaction. China Oceanwide and Genworth have made this point repeatedly to all regulators from the very beginning of our discussions, which started in 2016. China, Oshawa and Genworth will continue to engage with New York. However, we believe that if we can out reach an agreement with New York that is also acceptable to other state insurance regulators by the March, Genworth will likely need to move on and each party will have to weigh alternatives. During the last three plus years, shareholders and other stakeholders have asked us about Genworth's alternative scenarios.

The Genworth Board has evaluated the shareholder value of the China Oceanwide transaction against many other alternatives during the last three years. Each time we extend the merger agreement, the Genworth Board, Genworth Management and our external financial and other advisers evaluated the transaction's shareholder value against value in these other options. Each time the Genworth Management discussed the Oceanwide transaction with the Board, we believed it was the best and most certain alternative for shareholders and all stakeholders, including policyholders. Perhaps the best evidence to support this view is the current discount of Genworth's share price to the $5.43 per share offer from China Oceanwide. Genworth is prepared to move forward with the best plan B if we are unable to reach an agreement with New York that is also acceptable to China Oceanwide.

Like in the case of the China Oceanwide transaction, our objective in any alternative plan will be to create the most long term value for shareholders and other stakeholders. During the last three years that we have focused 100% on closing transaction, Genworth has at the same time strengthened its financial position, delivered outstanding performance in USMI and executed against our LTC multi year rate action plan, all of which has helped stabilize the financial condition of the company. We have also considered how the extensions and concessions we made may impact other alternatives. Fortunately, a number of the steps we took to accommodate regulators and others were consistent with actions that we would likely need to take under any alternative plan the Genworth board might approve in the future. The following steps completed by Genworth during the last few years were consistent with action steps we would likely need to take in other alternatives.

First, we refinanced the $597,000,000 of senior debt due on May 2238 with cash on hand and the secured debt financing we issued on 03/07/2018. Second, we received two consents from bondholders to further isolate the life companies from USMI. Third, we sold Genworth Canada on December 1239 to Brookfield for 1,800,000,000.0 As we described and detailed in the original shareholder proxy statement issued on January 2537, in connection with the 03/07/2017 meeting to approve the China Oceanwide transaction, Genworth's other alternatives, including selling one or more of our mortgage insurance assets to reduce debt as required to improve Genworth's financial strength and financial flexibility. Fourth, part of the proceeds from the Genworth Canada sale have been used to retire Genworth's $445,000,000 20 '18 secondured debt and Genworth's $397,000,000 senior debt due in June 2020. As a result, as of today, public debt has been reduced from approximately $3,600,000,000 to approximately $2,800,000,000 Fifth, as of the recent debt reduction, Genworth Financial's cash position is approximately $1,000,000,000 This represents approximately $600,000,000 above our cash target and provides a significant resource for Genworth to continue to reduce its parent's debt and meet other obligations to stakeholders.

This is particularly important given our $1,100,000,000 of debt maturities due in 2021 and potential future cash payments in connection with the AXA litigation, which Kalle will discuss in her remarks. We are very fortunate to have China Oceanwide as our strategic partner in a larger transaction. While we both have been 100% committed to closing the transaction, China Oceanwide allowed Genworth to implement a significant number of steps over the last three years that Genworth would likely have had to complete if the transaction was terminated. Although shareholders are unhappy with how long this deal process has taken to date, and rightly so, shareholders should be pleased that China Oceanwide allowed Genworth to implement these five major steps. The Genworth Board and I are very thankful for Chairman Luz and China Oceanwide's patience and flexibility at every step Genworth has had to take over the last three years.

If we receive New York approval and complete the other steps necessary in order to close the Oceanwide transaction, we plan on closing the transaction by 03/31/2020. If we do not receive New York's approval and have to terminate the transaction, Genworth will use the following principles in choosing the best alternative plan B. Create the most long term value for shareholders and other stakeholders, build on the five steps we have already completed weigh the execution risk of alternative options and their likelihood of success consider the best possible options for Genworth Australia or GMA and U. S. Mortgage Insurance or USMI consistent with creating the most long term value.

Use any potential additional cash proceeds generated by possible future options to protect long term shareholder value, which could include further debt reduction or returning capital to Genworth shareholders. Protect USMI's financial strength rating, which is absolutely critical to protecting and enhancing USMI's long term value for our shareholders. And finally, if we are unable to close the Oceanwide transaction, we will announce our go forward strategy and engage with investors directly to discuss our plans. Through this engagement process, we will be open to shareholder reviews on various other feasible alternatives. Following that effort, we would consider hosting an Investor Day.

A critical strategic priority for Genworth is to continue to achieve actuarially justified premium increases for our legacy LTC books of business. This will remain a critical priority under the China Oceanwide transaction or any Plan B alternative. We continue to make progress under our multiyear LTC premium rate action program or MIRAT. As of the end of twenty nineteen, Genworth has achieved cumulative approved LTC premium increases equivalent to $12,500,000,000 on a net present value basis and an increase of $2,000,000,000 over year end 2018. I believe it is extremely important to all of our policyholders and state regulators that Genworth remained financially stable in order to continue to service its 1,100,000 LTC policyholders as well as continue this necessary and successful rate increase program that will enable Genworth to meet its future obligations to our LTC policyholders.

With that, I will turn the call over to Kelly, who will provide a more complete discussion of the fourth quarter twenty nineteen assumption review process and LTC cash flow testing as well as review our strong 2019 results and current capital position.

Speaker 3

Thanks, Tom, and good morning, everyone. Today, I will cover our fourth quarter financial results and our annual assumption review. I will also discuss capital levels in our businesses and provide updates on cash and flexibility at our holding company now that we have completed the Genworth Canada sale and subsequently retired approximately $840,000,000 in debt through January 2020. As we discussed in detail last quarter and noted in our press release, our current and historical financial statements fully reflect the disposition of Genworth Canada. During the quarter, we recognized a net loss from discontinued operations comprised mainly of two pieces: $1.57000000 of income primarily from Genworth Canada, which included a favorable tax adjustment as we refined our tax position related to the divestiture that closed in December, a charge in the amount of $110,000,000 after tax related to Genworth's former payment protection insurance business, which was sold to AXA in 2015.

This followed a U. K. Court ruling in early December twenty nineteen. The charge covers an interim payment made in January with respect to any damages which could be awarded following a June damages hearing. While not common in The U.

S, interim payments are common in The U. K. Legal system prior to damages being determined. We have initiated the process for appealing certain aspects of the December ruling. At this time, we are uncertain of the ultimate outcome of our appeal and the June damages hearing, and we are also unable to estimate additional amounts that may be due or demanded under a ruling.

To date, AXA has submitted to us invoices claiming aggregate losses on payments to customers of approximately £430,000,000 which may be amended prior to the damages hearing. AXA is also seeking a tax gross up on the amounts invoiced. We have not yet determined the validity of the specific claims on the invoice amount submitted to us nor the appropriateness of a tax gross up. Damages will be the subject of the June hearing. Turning back to earnings.

We reported a net loss available to Genworth shareholders for the quarter of $17,000,000 and adjusted operating income of $24,000,000 Full year 2019 net income was $343,000,000 versus $119,000,000 in 2018, and full year 2019 adjusted operating income was $420,000,000 versus a loss of $5,000,000 in 2018. Our mortgage insurance businesses continue to perform well with strong loss ratio performance in The U. S. And very solid capital levels in both platforms. Our U.

S. Life results were mixed, driven primarily by an assumption update on universal life insurance related to lower interest rate assumptions in addition to a few other items. Total UL charges reduced earnings by $139,000,000 but were partly offset by continuing strong in force rate action results in long term care insurance. In USMI, overall results continue to reflect solid fundamentals, including low interest rates, steady economic growth, low unemployment and stable housing prices. USMI's adjusted operating income was $160,000,000 in the quarter, which was up $23,000,000 sequentially and $36,000,000 versus the prior year.

Results in the quarter did reflect positive updates to unearned premium reserves and loss reserves of $11,000,000 after tax and $10,000,000 after tax, respectively. Both updates reflect sustained underlying fundamentals, performance and the lower interest rate environment. The fourth quarter reported loss ratio was 4%, which is down seven points from the prior quarter and down three points versus the prior year. The earnings curve and reserve updates in the quarter reduced the loss ratio by six points. New delinquencies for the quarter were up modestly on a sequential basis, reflecting seasonality and up year over year with the larger in force portfolio.

Favorability in net cures and aging continued but did moderate from the first half of the year driven by seasonal trends. Primary insurance in force in USMI continues to grow, reaching its all time high of $192,000,000,000 at the end of fourth quarter twenty nineteen. This is up 15% versus last year and reflects very strong levels of new insurance written, offsetting lower persistency from elevated refinancing activity given the dip in rates. The U. S.

Mortgage origination market remained strong and was up versus the prior year from higher purchase originations and refinancing. Our flow new insurance written or NIW for the quarter was $18,100,000,000 down 4% sequentially and up 95% versus the prior year. We expect our USMI fourth quarter twenty nineteen estimated market share to have remained strong. We continue to manage to an overall return expectation in the mid teens on the 2019 book year. Moving to Australia.

We have been closely following the tragic bushfires. At this time, we do not believe there will be any meaningful impact to the business, and our exposure would most likely be limited to any economic downturn that may occur in the impacted regions. We are working with our lender partners to assist borrowers who may be experiencing hardships as a result of the fires, and we could see a temporary uptick in delinquencies in the coming months, followed by a higher rate of cures as we have seen in past natural disaster events. Regarding Australia's financial performance for the quarter, our flow new business levels were up 9% versus the prior quarter and 28% versus the prior year, primarily from recovery in the higher LTV market and larger mortgage origination volume from certain key customers. Adjusted operating income was $12,000,000 in the quarter, which was flat sequentially and down $6,000,000 versus the prior year on lower earned premium and investment income.

The U. S. GAAP loss ratio for the quarter was 30%, down six points versus the prior quarter, primarily from seasonally lower new delinquencies net of cures and up one point versus the prior year. On Australia's IFRS accounting basis, the loss ratio of 41% in the quarter and full year loss ratio of 51% was in line with the full year 2019 loss ratio expectations of 45% to 55%. Consistent with last year, our mortgage insurance business in Australia evaluated its premium earnings recognition pattern during the fourth quarter, which concluded with no recommended changes.

Turning to our U. S. Life Insurance segment, we completed our annual review of GAAP active life margins in the fourth quarter. The results of our testing for the total long term care block, both the policies written since late nineteen ninety five as well as the acquired block or policies written prior to late nineteen ninety five, was a combined positive margin of approximately $500,000,000 to $1,000,000,000 which is comparable to 2018. I will discuss the key updates we made to the assumptions in a moment.

Regarding quarterly financial performance, we continue to see positive adjusted operating income in Long Term Care, driven by strong results with our multiyear rate action plan. Claim terminations continued to be seasonally lower for the second half of the year. Benefit utilization rates on existing claims, which were updated each quarter on a rolling basis, had a slightly favorable impact on earnings for the quarter, but not as favorable as in the prior quarter. New long term care continue to reflect higher claim counts on our larger Choice one and Choice two blocks, which we expect as those blocks age. However, we did see favorable development on incurred but not reported or IBNR claims during the quarter, which more than offset the incremental new claims expense.

The overall benefits of the in force rate actions for long term care, particularly the reduced benefit impacts as illustrated on Page 11 of the investor deck released this morning, continue to be strong. This is primarily related to the recent rate increases in some of the larger states, which are now being implemented. As Tom noted, our 2019 approvals on a net present value basis are expected to be worth approximately $2,000,000,000 in margin improvement. As we discussed last quarter, these rate action approvals included expanded reduced benefit and stable premium options, which continue to be selected at a higher frequency by our policyholders as many of these policyholders have been subject to multiple rounds of increases. We expect a meaningful level of reserve releases from long term care benefit reductions associated with the premium rate increases to continue as we go into 2020.

Given the varying sizes of states and approval amounts implemented, as well as different reduced benefit choices that policyholders can select, the level of reserve releases from reduced benefit elections may vary from quarter to quarter in the future. Regarding our active life margins, we reviewed the key assumptions and updated where appropriate. These updates included routine updates for lab, mortality, expenses and interest rates. 2019 margins include significant unfavorable updates for incidents, particularly on our newer products as well as for benefit utilization. These last two unfavorable items drove material updates to our in force rate action plan, which is essential to our strategy of proactively managing and mitigating adverse emerging experience.

Our large choice two block and newer policy series experience continues to develop with more credibility as more policyholders go on claim. Our incidence assumption includes approximately 11,000 claims from Choice two and newer series, which is less than 5% of claims since inception for the overall long term care block. As we obtain more experience, we credibility weight this developing experience more over time in the overall assumption review process. While our twenty eighteen new block incidence assumptions on these newer products performed well in aggregate, we have seen lower incidence rates on younger policyholders 75, but are beginning to see higher incidence rates on policyholders over the age 75 versus our original assumptions. Given that the majority of our claims will occur at these older attained ages, it was important for us to reflect this emerging experience.

Another key driver in our assumption updates was the update to longer term benefit utilization rates. While we had some favorable impacts on earnings from the quarterly utilization rate updates in the last half of the year, it was driven by small favorable changes to sensitive cells and overall utilization experience in 2019 was unfavorable to our margin testing projection. We expect overall benefit utilization rates to decline each year as benefit pools grow and each year we recalibrate the starting point of the trend to reflect actual experience. In 2019, this resulted in a decrease to margins given that utilization was unfavorable to our projection. A number of smaller updates were also made in 2019, including a refresh of interest rate and expense assumptions.

As a reminder, we discount our GAAP margins using our portfolio yield, which moves more slowly than changes in current levels of interest rates. Our updates to our in force rate action plan now include an estimate of future not yet approved rate actions of approximately $7,500,000,000 which has grown from last year, but offsets the net unfavorable impacts from other assumption updates. We are considering similar updates as we're in the process of finalizing our cash flow testing assumptions for our New York subsidiary, GLICNY. Note that unlike GAAP loss recognition testing that uses best estimate assumptions, in statutory cash flow testing, the tests are done on a legal entity basis with provisions for adverse deviation. We are starting to see emerging experience regarding higher severity in our GLICNY policyholders versus nationwide experience, but this limited experience is not yet fully credible and more data and analysis is needed.

We have historically used nationwide experience for setting long term care assumptions and cash flow testing for all of our legal entities, including GLICNY, which is consistent with industry practice given the lack of statistical credibility for other approaches. Genworth has been a leader in recognizing the many issues in the long term care insurance industry and proactively taking appropriate action. Our efforts updating our multi year rate action plan align to this approach. Most of the additional rate action assumptions added to this year's multiyear rate action plan are on newer product series, including products where we have not requested rate increases in the past. Our nationwide cumulative average rate increase achieved for Choice two is approximately 70%, with nothing received on the newest blocks and 200% plus for some of our older legacy policy series with some states approving 300% plus on some of the legacy products.

These newer product series also have a lower attained age and a longer runway for collecting additional premiums. This allows for smaller and more manageable premium increases for our policyholders but a higher net present value benefit for the approved premium increase. Turning to life insurance. As I mentioned earlier, our results include a $139,000,000 charge for universal life, primarily related to an unlocking charge mainly to reflect the lower interest rate environment as well as model corrections. Overall mortality in Life for the quarter improved versus the prior quarter and prior year.

The term life business continues to be negatively impacted from shock lapses that are higher than our original locked in assumptions, especially with the large twenty year level premium term life insurance blocks written in 1999 and 2000 entering their post level premium periods. Total term life insurance DAC amortization, a noncash impact, primarily related to these term life lapses, reduced earnings by $21,000,000 after tax, which is flat versus the last quarter. We expect amortization related to the 1999 and 2000 blocks to remain elevated through 2020 and early twenty twenty one as more of this business enters the post level premium period and lapses accelerate. Similar to long term care, we also completed our actuarial assumption updates for our life products during the fourth quarter. These assumption updates for life insurance mostly focused on mortality, persistency and interest rates.

Most of these updates were in line with existing assumptions in aggregate with the exception of interest rates and mortality in the term products. The January after tax charge in Universal Life in the current period is primarily driven by the interest rate environment where the ten year treasury decreased 77 basis points during the year and the forward curve flattened considerably. This charge is noncash and primarily represents an increase in reserves and accelerated amortization of deferred acquisition costs. Mortality assumption changes in the term products, which had no financial impact in the current period, focused on improvements to mortality during the post level premium period based on observed trends and emerging experience. These refinements to our mortality assumptions increased the margin in the term product.

In our fixed annuity products, we did not record any charges related to loss recognition testing in the current quarter compared to $13,000,000 recognized in the prior quarter and $17,000,000 in the prior year. Additionally, reserves were reduced on our fixed indexed annuity product due to slightly higher interest rates versus the prior quarter and year, and our immediate annuities benefited by higher mortality or decreased longevity versus the prior quarter and year. Our adjusted operating loss in Corporate and Other was $50,000,000 for the quarter. This loss was higher versus last quarter and last year due primarily to less favorable tax timing adjustments. Results also reflected the higher expenses versus last quarter due to an overhead allocation true up and lower expenses relative to the prior year.

Now turning to capital levels. Our U. S. And Australian mortgage insurance businesses continue to maintain very strong capital positions. In USMI, we finished the quarter with a PMIERs efficiency ratio of 138%, up from 129% last quarter.

Drivers in the quarter include continued strong profitability, execution of an insurance linked notes or ILN transaction on the January 2019 new insurance written book and the sale of USMI's ownership of MI Canada for cash, which eliminated the PMIERs discount on affiliate stock. These drivers were partially offset by a $250,000,000 dividend paid during the quarter. The PMIERs sufficiency level is in excess of $1,000,000,000 above the level of required assets as of December 3139. You will notice that the book value that we publish in our GAAP quarterly financial supplement for USMI has increased. A large part of this increase is from the Canadian shares being converted to cash.

This occurred because USMI's ownership of Genworth Canada was previously eliminated in consolidation in Genworth Financial's financial statements as filed with the Securities and Exchange Commission. When I announced USMI's October dividend on last quarter's call, I mentioned that we expect USMI to be able to pay an annual dividend going forward based on its strong capital levels and our current plans. These plans assume favorable trends and performance continue within the business. They also assume macroeconomic factors such as The U. S.

Housing market and employment levels continue to be strong but moderate from twenty nineteen's robust growth. Future dividend amounts and timing will be based upon a variety of factors, including economic factors, regulatory constraints, ratings considerations, business performance and the transaction with Oceanwide. Our Australia MI business ended the quarter with an estimated capital ratio of 191, down from 198% last quarter, which is in excess of 400,000,000 above the high end of the prescribed capital amount or PCA management target range of 132% to 144 percent. The decrease in Australia's capital ratio primarily reflected the special dividend of AUD 100,000,000 that was paid during the fourth quarter. Finalizing our U.

S. Life capital levels requires completion of our ongoing statutory cash flow testing processes, including stand alone testing requirements such as AG38 as well as the matters under consideration for GLICNY that I referred to earlier. We are currently working through these processes and will disclose results when finalized closer to our 10 ks filing later this month. Absent any impact from cash flow testing, we would expect capital in Genworth Life Insurance Company or GLIC as a percentage of company action level RBC to increase compared to the 199% as of the end of the third quarter. U.

S. Life statutory income in the quarter benefited from earnings in long term care from in force rate actions as well as income in variable and fixed annuities. Additionally, during the quarter, U. S. Life executed a reinsurance transaction by consolidating and restructuring three existing captive entities that were used to finance excess statutory reserves for universal interim life insurance.

This transaction increased Genworth Life and Annuity Insurance Company's capital by approximately $175,000,000 reducing annual financing and administrative costs by approximately 5,000,000 to $10,000,000 and benefited the overall GLIK consolidated RBC ratio by approximately 10 to 15 points. I want to remind investors once again that as part of the initial agreement with Delaware regarding the Oceanwide transaction, Genworth will contribute $175,000,000 to GLIC. This contribution to GLIC is a special commitment made as part of the Delaware approval process and in conjunction with the proposed transaction with Oceanwide. This is possible due to the $1,500,000,000 capital contribution committed as a part of that transaction. Absent any contributions made to U.

S. Life subsidiaries in connection with the closing of the Oceanwide transaction, it is our intention to manage all of our U. S. Life entities, including GLICNY, on a stand alone basis with no plans to infuse any additional capital. The U.

S. Life businesses will rely on their consolidated statutory capital, prudent management of in force blocks and actuarially justified rate actions to satisfy policyholder obligations. Moving to the holding company. With the Genworth Canada sale to Brookfield complete, we ended the quarter with approximately $1,500,000,000 in cash and liquid assets, up from $366,000,000 from the prior quarter. During the quarter and depicted on Page 17 of the investor deck, net proceeds to the holding company from the MI Canada sale were $1,200,000,000 with approximately $800,000,000 remaining after paying off the term loan.

During the quarter, the holding company also benefited from $334,000,000 in dividends, which included $250,000,000 from USMI, dollars 34,000,000 from Australia's special dividend as well as Canada's ordinary and special pre close dividends of $50,000,000 Intercompany tax payments, which were elevated this quarter due to timing of certain items, were a source of cash to the holding company. Other miscellaneous items, primarily driven by lower cash collateral from an uptick in interest rates, increased during the quarter, benefiting cash by approximately $12,000,000 And finally, offsetting these inflows during the quarter were interest payments of $44,000,000 As noted in my earlier remarks, following quarter close, we paid AXA $134,000,000 plus attorney fees, and we fully redeemed the $397,000,000 of outstanding debt due in 2020 plus accrued and unpaid interest and make whole fees. As we manage our liquidity in 2020 and beyond, we are planning for the repayment of our intercompany note of $200,000,000 to Genworth Life Insurance Company that is due in March, possible incremental litigation expenses with AXA damages hearing taking place in June and approximately $1,100,000,000 in combined debt maturities in February and September. Before I conclude, we continue to receive inbound investor questions regarding the underlying components of Generis value we discussed on our second quarter twenty nineteen call.

As our fourth quarter results demonstrate, our U. S. Mortgage insurance subsidiary continues to be a strong business given the sustainability and favorable economic trends, its underlying new business growth, favorable loss performance and capital initiatives. Genworth Australia has improved in value comparing the June 3039, stock price to its closing trading price yesterday of $3.91 per share in Australian dollars. For U.

S. Life, we believe it is appropriate for investors to continue to value this business at zero given our isolation actions. As Tom said, we continue to believe that the Oceanwide transaction is the best and most certain outcome for our shareholders, but wanted to provide an update on these perspectives given the inquiries we have received. In closing, it was a strong quarter for Genworth's mortgage insurance businesses as they continue to execute on their priorities and are performing very well financially with solid earnings, robust capital levels and significant dividends to the holding company. We remain focused on the operational progress, including our long term care rate action plan and other strategic actions intended to improve and help stabilize our U.

S. Life insurance businesses. With that, let's open it up for questions.

Speaker 0

Thank you. And ladies and gentlemen, we will now begin the Q and A portion of the call. As a reminder, please refrain from using cell phones, speaker phones or headsets. Press 1 to ask a question. Our first question comes from Ryan Krueger with KBW.

Please go ahead.

Speaker 4

Hi, good morning. I had a few questions. First, can you give us any indication of the potential size of the capital contribution that New York is asking for? And then, I guess, any more perspective on would you be willing to make some level of capital contribution to New York to get their approval, but just less than they're currently asking for?

Speaker 2

So, Ryan, you know, that's a it's a very good question. It's very hard to answer because, you know, we're in active discussions, with New York. What what I would say is China Oceanwide and Genworth are willing to make a capital contribution. The size is to be determined and to be discussed with New York. The one thing I would remind people is GLIC, and with life insurance company, the you know, the LTC policies, a little over a million policies, a 40,000, I think, for for all 49 states.

And so the 49 states, you know, have a interest in GLIC and GLIC's capital position as part of their transaction. We did agree, as you all know, to put a 175,000,000 into BLIC China Oceanwide, and we agreed to that. In the case of New York, in the original approval, they didn't ask for capital. They are now, and part of that is clearly the fourth quarter review that and discussions we're having. One thing that I I tried to say in my remarks is, Glickney is much smaller than GWIC.

76,000 policies only in New York, so it's one state. And I think part of the challenge for Genworth and Oceanwide on one side and New York on the other side is it's just not the two parties because there's 49 other states and 49 other regulators who also will have an opinion. And so, one of the things that we have to keep in mind is the the views of Delaware and Virginia. There are two other lead states and then North Carolina, is, USMI, but they all have LTC policies, North Carolina, Virginia, and Delaware in GWIC. So the size of any capital contribution, obviously, it's important to New York.

They'll want more than less, but we do have to make sure it's reasonable given what we agreed to for the 49 state company.

Speaker 4

And is that because the capital contribution would actually come from from GLIC, or would the capital contribution come from the holding company, but they just want to make sure the amount is fair relative to what you agreed to put into Delaware?

Speaker 2

What we're talking about would be a capital contribution from Genworth Financial apparent.

Speaker 4

Okay. And then my just last question. If well, I guess related to the New York, so if you do get the approval from them would before March 31, would you be willing to extend the agreement beyond March 31 if you haven't received all the other approvals at that point? Or is that comment just specific to New York?

Speaker 2

So another good question, Ryan. I I would say that we have all the key approvals except for New York. So if we could come to a conclusion with New York soon, and we've been talking to them for many months, and they approved, and their approval was acceptable to the other regulators who have approved. And we we still owe a few pieces of financial information. Some of it's relative to results for China Oceanwide in their, you know, recent quarters and things.

But I think if New York if we could agree with a capital amount with New York that was acceptable to China Oceanwide, acceptable to other regulators, then I think we're ready. Genworth is ready to close. I think Oceanwide is also ready to close. As we've said before, the one remaining significant issue in China is they would have to talk to the state administration of foreign exchange or SAFE, in terms of the 2,700,000,000.0 they're paying to, purchase Genworth. Where is that coming from?

And China Oceanwide does have significant excess cash in China, and if they were able to use that, that would cover the purchase price. However, this has been part of the filings for more than a year, to the extent that SAFE put a limit on how much capital could come out from China, they do have a contingency plan to fund the balance of the transaction from outside of China. So that would be if New York if we agree with New York, acceptable with China Oceanwide, acceptable with other regulators, we're both ready to close, and then we would just you know, then China Oceanwide obviously is in the lead in discussions with SAFE about, where the funding comes from. And therefore, we certainly our goal is to close by the end of the first quarter. We recognize that it's been three and a half years and we can't keep extending forever.

Speaker 4

Got it. Thank you.

Speaker 0

Thank you. Our next question comes from Joshua Esterov with Credit Suisse. Please go ahead.

Speaker 5

Hi, thank you. Good morning. So with regards to what you were just mentioning, with China Oceanwide needing regulatory approval from SAFE, is that a process that can only start once The U. S.

Speaker 2

I didn't quite catch the last of it. So will you repeat your question, Jonathan? A good question. Regards to

Speaker 5

China Oceanwide requesting approval from, say, for the currency conversion and and and purchase, is that a process that can only start once The US regulatory process has concluded?

Speaker 2

So so first of all, there there have been other China regulatory approvals, including with the NDRC. That was passed on. I think the remaining issue is with SAFE. Chairman Lu, who's the owner of Oceanwide and the Oceanwide management team, have been talking to all the regulators and others in China. I I have said in the past that I think because of the aging problem in China, if you read a lot of public commentary from the government and others in China, there is a significant elderly aging problem.

I do think generally China and the regulators are supportive of the deal. I've talked to CBIRC, which is the regulator, four or five times, and they've always been supportive because of the Genworth expertise. SAFE has been in touch with Oceanwide along the way. I think they know it's hard for SAFE to make a final determination of what they're going to approve until they know what the final deal is. I will say that none of the China regulators have asked for any concessions, any accommodations on our deal over the last three point five years.

The only concessions and accommodations were from Genworth regulators. So first we had CFIUS, and that took eighteen months. And then we had the Delaware process, and they wanted the $175,000,000 and that was approved. And then OSFI wouldn't really give us an answer, and so we felt the only way around that was to sell Genworth Canada. We think we got a very attractive price for it, so did China Oceanwide.

So that meant that we didn't need the Canadian regulatory approval. I did say in my remarks, one of the things that I want to give a lot of credit to is China Oceanwide and Chairman Lu because we both would have preferred to keep Genworth Canada. It's a good company, but we were committed to do the deal. He did know that if we couldn't get all the regulatory approvals, we wouldn't get the $1,500,000,000 from China Oceanwide, and we had the $397,000,000 of debt due in June. We do have the GLIC note that I think Kelly talked about, is 200,000,000.

We made 1 and 35,000,000 payment to AXA. And we, you know, we have we did pay off 800,000,000 of debt to get that to 2.8. So I I would say that I think the China side of this transaction has been great. The Chinese regulators, I think, have been very good to work with. It's been more challenging in The US.

I'm not blaming any of the regulators. They all have their own issues. Obviously, they're the geopolitical issues that may be at the federal level. And then the states, because let's face it, LTC is a challenge. We still need we've gotten 12,500,000,000.0 net present value of premium.

That's not easier easy for those 50 states to give to give those large premium increases. On page 12, you can see the history. We talked about it. We've gotten more than 200%. Some regulators have given us more than 300.

So again, I do think, in fairness to Delaware and New York, they do see part of this as they know we're not if there's no deal, we're not putting capital in. And if there is a deal and we close, we're not putting capital in the future. So there is an opportunity for the regulators to at least ask for capital. And we've been, as I said, China Oceanwide, given them a lot of credit. They've been open and flexible to accommodate various US based regulators and also Canada.

But with New York, it has to come down to is their request, one, reasonable and something that Genworth and Oceanwide are comfortable with? And then two, is Delaware, Virginia, and all the other 49 regulators, do they think whatever we committed to New York to get their approval is fair versus what we agreed to with GLIC, given that GLIC is much a much larger company.

Speaker 5

Yes. I really appreciate all those thoughts on the regulatory front. Thank you very much.

Speaker 0

Thank you. We'll next go to Bill Cavaller with Lightspeed Partners.

Speaker 2

Hey, Tom. I'm going to try this again. If I get my numbers right, you're paying basically $175 per policy, which means that New York is owed roughly $13 million, maybe call it $15,000,000. Is would that be accept is that kind of where where you're offering and they're asking for dramatically more? That is my first question.

And my second question is, are you talking to the staff or is this actually coming directly from the director of DFS? Thanks. So good questions. Two part question. I'll take the first part.

There are there are different metrics you can use to compare the size of New York, to, the Delaware company. One is lives, and so it's 76,000 to a 1,040,000. The other is relative capital and since we haven't finished the statutory process yet, I'll go with nine thirty numbers. At 09:30, the capital in New York was around 300,000,000 and the capital in GLIC was $2,000,000,000 So if you do that basis, dollars 300,000,000 to $2,000,000,000 I think it's 15%. And then if you look at premiums, generally the premiums are higher per policy in New York than the other states because New York is more expensive.

For example, I think the average cost for a year in a nursing home in New York is $125,000 The national average is 100,000 So generally, I think the agents and financial advisers who sold those 76,000 policies generally have the policyholders in New York buy higher daily benefit amounts. So therefore, the daily benefit amount per policy is higher in New York. So the premiums on average in New York are higher. So if you do premiums on the 76,000 policyholders, I'm using 2018 data, It's around $240,000,000 were the annual premiums in 'eighteen. And the annual premiums in GLIC were about 2,400,000,000.0 so roughly 10%.

So those are different metrics. We've talked about different metrics, different bases with New York. And I'm not gonna go into where we are with New York, but would say I think it does matter ultimately, and I would just expect we are talking to Delaware. We're talking to Virginia. And I talk to all 50 states all the time because I'm generally involved in all the premium increase discussions.

So I have a good sense where all the regulators are. And I think I will tell you, I think all the regulators that are part of GLEC want this deal to happen because they see the benefits to their policyholders of this deal. There's no question about that. And I think they understand that, you know, New York and we are discussing, and Kelly talked about the nationwide experience, the New York only experience, so how you view that. What I will say is we have the total claims all time in New York are 13,000.

The total claims all time for Genworth are 280,000. So when you look at 13,000 claims and 280,000 claims and you project those in the next thirty years, clearly the claim experience on 280,000 is more credible, more actuarially significant. But the question is on the 13,000, that and Kelly talked about this, is that we are experiencing higher claims than in nationwide. But with only 13,000 claims, we really don't know if that's fully credible. I don't think the New York regulator really knows that either.

And if it is fully credible, at some point we're going to have to have premium increases to cover that. But it could also be that as the 13,000 claims grow, that it reverts to the mean and the New York experience ends up looking more like the experience than the 280,000. So that's unnotable, and it makes it a little bit complicated in these discussions in terms of what you think about the New York only experience in the nationwide. Different people, different actuaries, we have our actuaries, have theirs, can have different opinions on that. It's a complex issue, but ultimately, I think what we're trying to do China is Oceanwide and generally really want this deal to close.

I think all the other states want it to close. I think New York wants it to close, but it comes down to what is a fair capital commitment to New York, and we're flexible on that. I think China Oceanwide and Genworth have shown flexibility. It's taken us a long time to get through all those things, but we've shown flexibility. But in the end, it's got to be an amount that New York thinks is appropriate, but that the other 49 regulators think is appropriate.

And that is somewhat of a complex process, as you can imagine. Understood. Thank you. This is very helpful. So this is still actuaries to actuaries.

This is still where you are in the process rather than at the top kind of way or at the approval level? I would say it goes from the top through the actuaries for Genworth, and it goes from the top through all the staff at New York. Thank you.

Speaker 0

Thank you. Our next question comes from Drew Figdor with TIG. Please go ahead.

Speaker 6

I was curious reading through the report we saw come out last night, it seemed that the margin testing was rather benign in terms of the long term care. So I'm curious what New York has found this year as so concerning that they need to have capital injected that but last year, they were fine and they didn't ask for anything in terms of capital commitment. So what changed in the year in terms of margin testing that New York is so concerned about?

Speaker 3

Drew, this is Kelly Growe. Thanks for the question. You know, what I would what I would say about New York is we we really just have very emerging experience. I mean, I think Tom mentioned about 13,000 cumulative claims. If you think about 13,000 cumulative claims, our view is those like I mentioned in my prepared remarks, those aren't credible just given the fact you've gotta look at different underwriting classes, different genders, different age groups of of the folks in different policy series because there were underwriting changes that occurred.

But but we have seen, as I mentioned, different experience, and particularly higher severity from some of those claims in New York. We don't quite view those as credible yet, but it is emerging. And, you know, that's the the discussion we're having. Now we're also under a a triennial exam right now, and so they're taking a much deeper look at it. And we are working with their group as a part of that exam and and discussing that experience.

But, you know, it it is under discussion, and we're working through the cash flow testing assumptions right now. Did that answer your question?

Speaker 2

Yeah. Thank you.

Speaker 3

Thank you, Drew.

Speaker 0

Thank you. And ladies and gentlemen, we have time for one final question from Himanshu Shah with Shah Capital. Please go ahead.

Speaker 7

Good morning, Tom. I have a question on your plan B. Do you think Genworth can get to $2,000,000,000 or more IPO in 40% to 50% of USMI in early q two if you cannot close this deal by the March?

Speaker 2

So, Homanshu, good morning, and thanks for the question. Thanks for being on the call, and thanks for being a good long term investor. I would say that our board has looked at all different kinds of alternatives, including, you know, I think all the possible alternatives with USMI. The only thing I would say is there are tax consequences depending on the amount of the IPO. So you could have significant tax friction, depending on the size that you do.

I'm not gonna, you know, try to value USMI. I think, we disclosed today the the book value for USMI, I think it's around 3,800,000,000.0. There are comparable companies out there that are publicly traded. That doesn't mean that we would trade the way they trade, but I think they're reasonable comparables. And so I think for you for you, Himanshu, or other investors, I think you have to look at our book value, look at the earnings.

The the 2019 earnings were strong in USMI, 568,000,000. So there's 568,000,000. Look at the comparable PE multiples. The book value is 3.8. Look at the comparable book value.

And then you can come up with a view as to what you think the values are. I would say that, and I'm sure you know this and others know that, when you go beyond a certain amount in the IPO, you you could create tax issues. And also and again, we're getting not getting in all the rules and etcetera. Depending on how much you do, you can prevent a future down the road opportunity to do a tax free spin off to Genworth shareholders. So I don't wanna go into all the different alternatives.

I will tell you, as I said in my script, we've extended this deal 13 times. Every time we extended the deal, we valued what we thought China Oceanwide was worth. It's pretty easy, 5.43 per share. We think it's the highest, and it's certainly the most certain because it's a specific price. Any of the other options, including the one you've talked about, it has all part of the reviews that we've done for the last three years.

And 13 times, we formally had board meetings where we evaluated the China Oceanwide deal versus the other alternatives, and we always concluded it was the best and most certain. If we are unable to close the deal with China ocean wide, we'll look at the alternatives, including the alternative. Himanshu, you just talked about, it's certainly a reasonable alternative. I think it's feasible, what you said. Whether it's the best alternative, I don't know.

The other thing, and we are running out of time, so I want to say to you and to all the shareholders, Kelly and I, Tim Owens, the Head of IR and others, we're always available to listen to your points of view on alternatives. Right now, we are under a merger agreement that doesn't expire to the end of the first quarter, so we can't really consider any alternative. We we can value them, but we can't consider it. But if we decide, which I think would be unfortunate for all stakeholders, including our shareholders, not to do the China Oceanwide deal, the Plan B will be the best value that the Board and management and our outside advisors concludes is the next best Plan B. And we'll certainly take your input, Himanshu, and you and I have talked about this before and several others I'm sure several other shareholders have their own views on this.

And we wanna we do Kelly and I and others at Genworth management team and our board do care what you all think. At the end of the day, it's our job to try to make a determination what's the best alternative. Right now, we think the best and most certain is Oceanwide. If we can't complete it, we'll look at the next best and most certain alternative.

Speaker 7

All the best, Tom. But the way the stock is trading at for the last three years or so and especially today, it clearly tells me that the company should plan aggressively for plan b.

Speaker 4

Thank you.

Speaker 2

You know, I think there's two ways to look at it, Himanshu. One is what you just said, and we'll do that. The other is that I do think, that most of the markets seem to agree that the best option is the China Oceanwide option, which is $5.43 because the stock has traded at a discount. And I think every time the stock has changed and when it's gone down, who knows why? We had a great fourth quarter, we had a great 2019, so I don't think it's because of our operating results.

We're making great progress on the LTC premium increases, so I don't think it's that. But I do think investors recalibrate the probability of the China Oceanwide deal closing. And so and I know what that's worth, $5.43. They all have the market has a view of what the next best alternatives are. And so I think when the stock goes down because we raised we wanna be transparent that we're in negotiations with New York.

I think that means shareholders put a lower probability on the Oceanwide deal closing. And I think the market is telling what I think it's telling the Genworth board and management is we prefer the OSHA wide deal. We agree with you it's the best and most certain deal. We continue to get over 90% support for all the directors on the board, including as of last December. When the stock falls, we're watching it as you are.

I think it's falling because investors are reassessing the probability of ocean wide closing, and it's falling because the $5.43 perhaps, they put a little probability on that. But I don't know. That's the market. Be assured, we hope we can close the deal. We're doing all we can to try to get it done.

We're talking to New York and then all the other regulators and China Oceanwide. I hope we get it done. If we can't, we'll do what you said. We'll move quickly to the best plan B. We'll talk to shareholders like yourself and get input.

And I believe we'll ultimately hold Investor Day so we can talk if we have to get to a Plan B, to talk about that and live, say whatever the plan would be, why we think it's the best. Shareholders have different views and based on those views, we think another alternative is better. Because in the end, it's about what's the best long term shareholder value to shareholders. And if there's another idea that merges better, we'd obviously consider it. So with that, Hamashi, I appreciate that.

I do want to say to all the investors, we ran a little bit over ten minutes. There's obviously a lot of questions in the deal, we wanted to take some of them. Kelly and I are happy to continue the discussions with any shareholders who want to give us their views or talk to us, please contact Tim Owens and IR. And let me just sum up, and then I'll turn it back to Derek to end the call. But all of us at Genworth, I want to thank you for your questions and your continued investment and interest in Genworth.

As I've said, we're working hard to close the China Oceanwide transaction. We continue to believe it's the best and most certain outcome for our shareholders and all of the other stakeholders. But having said that, I also want to be clear today that if we can't complete the transaction, we are prepared to move forward with evaluating other alternatives. And the board and I and the management team take very seriously our fiduciary duty to maximize the value to shareholders no matter what ultimate outcome we pursue. So with that, Derek, I'll turn the call back to you.

Speaker 0

Thank you. And ladies and gentlemen, this concludes Genworth Financial's fourth quarter earnings conference call. We do thank you for your participation. At this time, the call will end.