Q4 2019 Earnings Call
Please standby.
Good morning, ladies and gentlemen, and welcome to Genworth Financial's fourth quarter 2018 earnings Conference call. My name is Derek and I'll be your coordinator today at this time all participants are in listen only mode. We will facilitate a question answer session toward the end of this conference call.
That's 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'd now like turn the presentation over to Jim Owens, Vice President of Investor Relations Mr. Olin's you May proceed.
Thank you operator, good morning, everyone and thank you for joining Genworth fourth quarter 2019 earnings call.
A press release and financial supplement were released last night and this morning. Our earnings presentation was posted to our website and will be reference 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 Groh, our Chief Financial Officer.
Following our prepared comments, we'll open up the called for a question and answer period.
In addition to our speakers, Kevin Schneider, Chief operating officer, and dancing Chief Investment Officer.
Well the take your questions.
During the call. This morning, we may make various forward looking statements or actual results may differ materially from such statements.
You to read the cautionary note regarding forward looking statements in the earnings release unrelated presentation.
Well, it's a risk factors of our most recent annual report on form 10-K as filed with the FCC.
This morning's discussion also includes non-GAAP financial measures that we believe may be meaningful to investors.
Financial supplement earnings release, an investor materials.
GAAP measures have been reconciled to GAAP, where required in accordance with FCC rules.
Also when we talk about our results of our Australian business. Please note that all percentage changes exclude the impact of foreign exchange.
Finally references to statutory results are a testament to the timing of the filing of the statutory results.
And now I'll turn the call odor, our CEO called Mcinerney.
Good morning, and thank you for joining todays call today I will focus my remarks on the status of our pending transaction.
[music].
As we have previously discussed including during the December 12, 2000 banking Genworth annual shareholders meeting.
After the successful closing the sale the company's interest engine with Canada for approximately 1.8 billion.
The two key remaining Joe with approvals for the China, Oceanwide transaction or from the GE Etsys I'm in New York regulator, The New York Department of financial services.
These regulators had previously approved drugs like friends action not because of the transaction closings away given the time to talk to complete the Genworth, Canada sell their respective approvals expire.
Yes sees and happy just say they're regulator.
We approved the transaction meeting New York's approval, that's the most significant remaining genworth approval.
Jim with a new York have done a gauge for months and discussions regarding fourth quarter 19. It sounds from review for Genworth Life Insurance company of New Yorker, Gluttony re approval of the transaction.
As part of the discussion process, New Yorkers recently told China Oceanwide in January that the re approval would be condition on a capital contribution.
Financial.
The parties may or may not be able to reach a mutually acceptable compromise any capital contribution to GLICNY would require oceanwide consent under the merger agreement.
Good where shareholders and other stakeholders are well aware of the many transactions Kenosha, one and John would have made to various genworth regulators.
Some transaction was announced three plus years ago.
He's consumptions and the willingness of China Oceanwide, a journalist to continue this process for more than three years make a very clear how committed we both are to the transaction.
We have said many times the Genworth board and I believe the transaction is the best.
Certain strategic alternative for John were shareholders. It's also the best option for other stakeholders.
Putting our policyholders employees and a communities we serve.
Because of the comprehensive benefits or the transaction through our respective shareholders and all stakeholders.
Oh, you want in general what had been willing to consider transaction changes and regulatory accommodations to move the transaction forward.
I know to widen John with are acutely aware of a careful balance we need to strike to accommodate each regulator, while also making the overall transaction affair, an acceptable to all regulators and the stake holders they represent.
In the case or the keys state insurance regulators that must formally approved the transaction their primary criterion.
Whether another transaction isn't the best interest of their respective policyholders.
I do not consider the interest of shareholders and bondholders.
We have six state insurance regulators, who must approve the transaction.
We have approvals from five to six state insurance departments.
I would note that China, Oceanwide and Genworth are in the process of providing some regulators additional information so they can come from the approvals.
The Delaware Department of insurance is a key regulator for Genworth life insurance company or GLIC.
Look as the Genworth life subsidiary that is the ensure up over 1 million LTC policies across four United States on the district of Columbia.
By contrast, GLICNY has approximately 76000 LTC policies outstanding to New York Policyholders.
That's part of the December 2018 approval process with Delaware, China, Oceanwide agenda with agreed to contribute $175 million of capital to GLIC upon the closing the transaction.
I want to remind everyone listening on the call that we believe the policyholders have GLICNY neglect are clearly benefited by the Oceanwide transaction.
Regardless of the capital amount agreed upon with respect to regulators generalist capital contributions to either GLICNY <unk> are only being contemplated because of the wanted to have billions of additional capital China Oceanwide is contributing to gen. One gen.
Genworth is not going to make a contribution to either subsidiary and the absence of the transaction.
John I was wondering Genworth has made this point repeatedly to all regulators from the very beginning of our discussions which started in 2016.
Oh, you want agenda ones will continue to engage with New York. However, we believe that we cannot reach an agreement with New York that has also acceptable to other state insurance regulators by the end of March.
What will likely need to move on and each party, we'll have to weigh alternatives.
In the last three plus years shareholders and other stakeholders I've asked us about Genworth alternative scenario.
You don't want board has evaluated the shareholder value of the trying to Oceanwide transaction I got to many other alternatives during the last three years.
Each time, we extended the merger agreement the Genworth Board Genworth management, and our external financial another advisors evaluated the transactions shareholder value against the value in these other options.
Each time, the Gen with management discover the Oceanwide transaction with the board. We believe 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 share price to the $5 in 43 cents per share offer from China Oceanwide.
Then where there is prepared to move forward with the best plan B. If we are unable to reach an agreement with New York that has also acceptable China Oceanwide.
Well I can occasionally China Oceanwide transaction, our objective and any alternative plan will be to create the most long term value for shareholders and other stakeholders.
During the last three years or we have focused on 100% in closing the China Oceanwide transaction.
And with has had the same time strengthen its financial position delivered outstanding performance and U.S. in life and execute against or L.P.C. multiyear rate action plan all of which has helped stabilize the financial condition of the company.
We have also consider how the extensions and concessions we.
They impact other alternatives Fortunately.
However, the steps, we talked to accommodate regulators and others were consistent with actions that we would likely need to take under any alternative plan, but Jim with board might approved in the future.
The following major steps completed by Genworth during the last few years.
Consistent with action steps, we would likely need to take in other alternatives.
First we refinanced the 597 million of senior debt due on May 22nd 2018 with cash on hand, and the secured debt financing issued on March seven 2018.
Okay. We received two consents from bondholders to further isolate the life companies from U.S. Tomorrow.
Third we sold down with Canada on December 12, 2019 to Brookfield for 1.8 billion.
As we described in detail in the original shareholder proxy statement issued on January 27, 2017 in connection with the March seven 2017 meeting to approve the China Oceanwide transaction Genworth other alternatives, including selling one or more of a mortgage insurance assets.
Reduce that is required to improve genworth financial strength and financial flexibility.
For part of the proceeds from the Genworth, Canada. So haven't used to retire Genworth 445 million 2018 secured debt and general was 397 doing senior debt due in June 2020.
As a result as of today John was public debt has reduced from approximately 3.6 billion to approximately 2.8 billion.
Yes, that's the reason debt reduction Genworth financial's cast position is approximately $1 billion.
Represents approximately 600 million above our cats target and provides a significant resource for John would you continue to reduce its parents that and meet other obligations to stakeholders. This is particularly important given our 1.1 billion of debt maturities due in 2021 and potential future cash payments.
Connection with Axa litigation, which probably will discuss in her remarks.
We're very fortunate to have China, oceanwide strategic partner in a larger transactions.
While we both had been 100% committed to closing the transaction China Oceanwide allowed you don't want to implement a significant number of steps over the last three years. The genworth would likely have had to complete at the transaction was terminated.
Although shareholders on happy with how long the steel prices is taken today and rightly so.
Barrel or should be pleased to China oceanwide allow genworth to implement these five major steps.
The John with Board and I are very thankful for chairman lose in China, Oceanwide patience and flexibility at every step Genworth has had to take over the last three years.
We received New York approval and complete the other steps necessary in order to close the Ocean White transaction, we put on closing their transaction by March 31st 2020.
No not received new York's approval I'd have to terminate the transaction. So I'd want to use the filing principles and choosing the best alternative plan B.
Great. The most long term value for shareholders and other stakeholders.
Build on the five steps we have already completed.
Where are the execution risk of alternative options and their likelihood of success.
Consider the that's possible options for Genworth, Australia, or Jim Knight.
And you as a mortgage insurance, where you epsomite consistent with creating the most long term value.
Use any potential additional cash proceeds generated about possible future options to protect long term shareholder value, which could include further debt reduction.
Returning capital to jungwirth shareholders.
Protect your surmise financial strength rating, which is absolutely critical to projecting enhancing U.S. semis 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.
It's a game in process, we'd be open this year or views 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, one or the China, oceanwide transaction or any plan B alternative.
We continue to make progress under our multiyear LTC premium reduction program on my around.
As of the end of 2019.
What has achieved a cumulative approved LTC premium increases.
I want to 12 and a half billion.
On a net present value basis, and an increase of 2 billion over yearend 2018.
I believe it is extremely important to all of our policyholders and state regulators. The genworth remain financially stable in order to continue to service, it's 1.1 million LTC policyholders as well as continue this necessary and successful rate increase program that will enable genworth immediate future obligations to our.
Do you see policyholders.
With that I will turn the call over to Kelly, who will provide a more complete discussion of the fourth quarter 19 assumption review process.
LTC Castle testing as well as review, our strong 2019 results and current capital position.
Thanks, Tom and good morning, everyone today, I will cover our fourth quarter financial results and our annual assumption lithium and we'll also discuss capital level in our businesses.
Like update on cash and flexibility and our holding company now that we have completed the general Canada South.
Well, we retired approximately $840 million 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 gift position generally Canada.
During the quarter, we recognize the net losses from discontinued operations comprised mainly of two pieces $157 million of income primarily from Genworth, Canada, which included a favorable tax adjustment as we refined our tax position related did the divestiture that closed in December.
Q.
Charge and the amount of $110 million after tax.
Ladies and gentlemen, former payment protection insurance business, which will fall to access in 2015.
This solid UK court ruling in early December 2019.
The charge covers an interim payment made in January with respect to any damages, which could be award and falling engine damages hearing.
Well not common in U.S. interim payments are common in UK retail system prior to damages being determined we've initiated the process for appealing certain aspects of the December willing.
At this time, we are uncertain the ultimate outcome of our appeal.
And damages hearing and we are also unable to estimate additional amounts that maybe you are demanded underneath ruling.
To date access has submitted to us invoicing, claiming aggregate losses on payments to customers of approximately 430 million pounds, which may be amended prior to the damages hearing.
Actually it's also seeking a tax credits have on the amounts invoiced.
We have not yet determined the validity of the specific claims on the emblazoned Mount submitted to us.
For the appropriateness of a tax process.
Damages will be the subject of the gene hearing.
Turning back to earnings reported a net loss available the general shareholders for the corner at $17 million.
Adjusted operating income of $24 million full year 2019, net income was $343 million versus $119 million in 2018 and full year 2019, adjusted operating income was $429 person they lost about $5 million in 2018.
Our mortgage insurance businesses continued to perform well, let's try lots for circle, Farmington, U.S. and very solid capital levels, but platform.
Our U.S. life results were mixed driven primarily by an assumption update on universal life insurance related to lower interest rate assumption. In addition to a few other items.
Totally you all charges reduced earnings by $139 million, but were partly offset by continuing strong enforce reduction resulted in long term care insurance.
And you at the mine.
Our results continued to reflect solid fundamentals.
Moving low interest rate.
I'd economic growth low unemployment and stable housing prices.
You asked a nice adjusted operating income was $160 million in the quarter.
Was that 23 million sequentially.
36 million versus prior year.
Results in the quarter did reflect positive updates to unearned premium reserves and loss reserves.
$11 million after tax and $10 million after tax respectively. Both updates were flat sustained underlying fundamentals performance and the lower interest rate environment.
And fourth quarter reported loss ratio was 4%.
Down seven point turned the corner and down three points versus the prior year.
The earnings curve and reserve updates in the quarter reduce the loss ratio by six point.
Neither one quick teams for the quarter.
Modestly on a sequential basis, reflecting seasonality and up year over year with the larger inforce portfolio.
Capability in that carries an aging continued it did moderate from the first half of the are driven by seasonal trend.
Primary insurance in force in U.S. semi continues to grow reaching its all time high as a $192 billion at the end of fourth quarter 2019. This is up 15% versus last year and reflects a very strong levels of new insurance written offsetting lower persistency from elevated refinancing active.
Given the dip in right.
The U.S. mortgage origination market remains strong and was up versus the prior year I'm higher purchase originations financing.
Our flood insurance written or and I gave you for the quarter with $18.1 billion down, 4% sequentially and up 95% versus the prior year.
We expect our U.S. and my fourth quarter 2019 estimated market share it's rough remains strong.
We continue to manage through an overall return expectation in the mid teens on the 2019 bulkier.
Moving to Australia, you've been closely following the tragic bushfires.
At this time 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're working with our lender partners to assist borrowers who may be experiencing hardships as a result for the fires and we could see a temporary uptick in delinquencies in the coming month, followed by a higher ready carriers as we have seen in past natural disaster that.
Regarding australias financial performance for the quarter.
<unk>, new business levels were up 9% versus the prior quarter, 28% versus the prior year, primarily from recovery and higher LTV market and larger mortgage origination volume from certain key customers.
Adjusted operating income was $12 million in the quarter, which was flat sequentially and down $6 million versus the prior year on lower earned premium and investment income.
Lets cat loss ratio for the quarter with 30%.
Down six points versus the per quarter, primarily from seasonally lower new delinquencies net of cures and up one point versus the prior year.
On a strong as I have for less accounting basis, the watch ratio of 41% in the quarter and full year loss ratio of 51% was in line with the full year 2019 loss ratio expectation that 40, 555%.
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 with you at gap active like margins in the fourth quarter.
The results of our testing for the total long term care block, but the policies written since late night 95 as was the acquired block or policies written prior to late night 95, with a combined positive margin of approximately half a billion to $1 billion, which is comparable to 2018.
I will discuss the key updates we made to the assumption 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.
Terminations continued to be seasonally lower for the second half a year.
Utilization rates on existing claim what's your update 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 claims continue to reflect higher claim counts on our larger tweaks one choice two blocks, which we expect as those blocks age however, due to favorable development on incurred but not reported or idea and our claims during the quarter, which more than offsetting and then claims.
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The overall benefits of reinforced rate actions for long term care, particularly the Greece benefit impacts as illustrated on page 11 at the Investor deck released this morning continue to be strong.
This is primarily related to the recent rate increases and some of the larger state which are now being implemented.
As Tom noted.
2019 approvals on a net present value basis are expected to be worth approximately $2 billion in margin improvement.
As we discussed last quarter. These reduction approvals included expanded where do you spend effect in single premium options, which continued to be selected at a higher frequency by our policy holders as many of these policyholders have been subject to multiple rounds of increases.
We expecting 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 at states and approval amounts implemented as well as different reduced benefit choices that policyholders in flat.
A level of reserve releases on were gates benefit election may vary from quarter to quarter in the future.
Regarding our active life margin, we reviewed the key assumptions and updated where appropriate.
Update included routine updates for lab mortality expenses and interest rate.
Many 19 margins include significant unfavorable updates for incidence, particularly on our newer products as well as for them utilization.
Last two unfavorable items drift material updates to our in force rate action plan, which is essential to our strategy of proactively managing and mitigating factors emerging experience.
Our large twist to block and your policy series experience continues to develop with more credibility as more policyholders gone claims.
Our instance assumption includes approximately 11000 claims from 22 and newer series, which is less than 5% of claim since inception pretty overall long term care block.
As we had pay more experience we credibility weight this developing experience more over time and overall assumption review process.
Well, our 2018, new block incidents assumptions on these newer products performed well in aggregate, we have seem a lower incidence rate on younger policyholders under the age of 75 are beginning to see higher incidence rates on policyholders over the age of 75 versus our original assumptions.
Given that the majority of our claims will occur at these older attained age is it was important for us to reflect this emerging experience.
Another key driver in our assumption update was the update to longer term benefit utilization rate.
What we had some favorable impacts on earnings from the quarterly utilization rate uptake in the last half of the year. It was driven by small favorable changes to sensitive itself and overall utilization experienced in 2019 was unfavorable to our margin testing projection.
We expect overall benefit utilization rates to the claim each year as benefit pulls grow and each year, we calibrate the starting point at the trends reflect actual experience.
In 2019. This resulted in a decrease to margins given that utilization was and favorable throughout projection.
A number of smaller updates where else I made in 2019, including a refreshed with interest rate and expense assumptions as a reminder, we discount our GAAP margins using our portfolio yield which means more slowly than changes in current levels of interest rate.
Our updates to our in force rate action plan now included an estimate a future not yet approved rate actions of approximately seven and a half billion dollars, which has grown from last year, but offsets the net unfavorable impacts from other assumption update.
We are considering somewhere updates as we're in that process of finalizing our cash flow testing assumptions for our New York subsidiary Glut.
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.
Provisions for adverse deviation.
We are starting to see emerging experience regarding higher severity in aren't GLICNY policyholders versus nationwide experience, but this limited experience is not yet until incredible and more data and analysis is needed.
We have historically used nationwide experience for setting long term care assumptions in cash flow testing for all of our legal entities, including Gordon, 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 and the long term care insurance industry and proactively taking appropriate actions.
Our efforts updating our multiyear rate action plan for wanting to this approach.
Most of the additional rate action assumptions added divestures multiyear rate action plan, our newer products series, including products, where we have not requested rate increases and.
Our nation wide cumulative average rate increase achieved for choice to 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% class on some of the legacy products.
These newer product series also have a lower attained age any longer runway for collecting additional premium.
This allows for smaller and more manageable premium increases for our policyholders, but a higher net present value benefit idiot proof premium increase.
Turning to life insurance, because I mentioned earlier.
I will conclude a $139 million charge for universal life, primarily related to run unlocking charge, mainly to reflect the lower interest rate environment as well as not a correction.
Overall mortality in life for the quarter improved versus the prior quarter in prior year.
It term life business continues to be negatively impacted from shock lapses that are higher than our original locked in assumptions, especially with a large 20 years level premium term life insurance blocks written in 1999 in 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 million after tax which is flat versus the last quarter.
We expect amortization related to the 1999 in 2000 blocks to remain elevated 320 20, an early 2021 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.
He's assumption updates for life insurance, mostly focused on mortality persistency and interest rate.
Most of these updates were in line with existing assumptions in aggregate with the exception of interest rates and mortality in the term product.
The hundred 39 million dollar after tax charge and Universal life in the current period is primarily driven by the interest rate environment like a 10 year treasury to decreased 77 basis points during the year.
For her flatten considerably.
This charge is noncash and primarily represents an increase in reserves and accelerated amortization of deferred acquisition cost.
Mortality assumption changes in the term products, which had no financial impact in the current period focused on improvements to mortality during that says solve a premium period based on observed trends in emerging experience.
These refinements to our mortality assumptions increase 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 million recognized in the prior quarter and $17 million in the prior year.
Additionally, the journal reduced on our fixed indexed annuity product due to slightly higher interest rates versus the prior quarter in here and R. and D. The new these benefited by higher mortality decreased one ingevity versus the prior quarter in here.
Our adjusted operating loss in corporate another $50 million for the quarter this loss with higher versus last quarter and last year due primarily to less favorable tax timing adjustment.
Results also reflected the higher expenses versus last quarter due to an overhead allocation true up.
Lower expenses relative to the prior year.
Now turning to capital levels are you left and Australian mortgage insurance businesses continued to maintain very strong capital position.
And you ESL night, we finished the quarter with the P. murtha efficiency ratio of 138% up from 129% last quarter.
Drivers in the quarter include continued strong profitability execution of an insurance like notes or island transaction on the January to September 2019, New insurance written block.
And the sale of U.S. semis ownership and like Canada for cash, which eliminated the P. Myers discount on affiliate stock. These drivers were partially offset by a $250 million get been paid during the quarter.
P. Myers proficiency levels is in excess of $1 billion above the level of acquired assets as of December 31st 2019.
You will notice that the book value that we publish in our GAAP quarterly financial supplement for U.S. semi has increased a large part of this increase is from the Canadian shares being converted to cash. This occurred because you left semis ownership of Genworth, Canada was previously eliminated in consolidation in general financials.
Financial statement filed with the Securities and Exchange Commission.
When I announced U.S. semis October dividend on last quarter's call I mentioned that we expect U.S. there might be able to pay an annual dividend going forward based on its strong capital levels and our current plan.
These plans in favorable trends and performance continue within the business.
Also with him macroeconomic factors such as the U.S. housing market unemployment levels continue to be strong that moderate from 20 nineteens robust growth.
Future dividend amount and timing will be based upon a variety of factors, including economic factors regulatory constraints ratings considerations business performance and the transaction with his firm wide.
Our Australian and my business in the quarter with an estimated capital ratio of 191% down from 198% last quarter, which is in excess of 400 million Australian dollars above the high end at the prescribed capital amount or PC, a management target range of 132 to one.
Hundred 44%.
The decrease in Australia as capital raise show primarily reflected the special dividend of 100 million Australian dollars 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 Standalone testing requirements, such as the AG 38, as well as the matters under consideration for glut that I referred to earlier.
We're currently working through these processes.
Gloves results when finalize closer to our 10-K 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 actionable RBC to increase compared to the 199% as at the end of third quarter.
U.S. like statutory income in the quarter benefited from earnings and long term care from enforce rate actions as well as income in variable and fixed annuities.
Additionally, during the quarter.
That's like executed a reinsurance transaction by consolidating and restructuring three existing captive entities that we used to finance access statutory reserves for universal in term life insurance.
This transaction increased Genworth life, and annuity insurance companies capital by approximately $175 million, reducing annual financing and administrative costs by approximately $5 million to $10 million and benefited the overall glut consolidated RBC ratio by approximately 10 to 15 point.
I want to remind investors once again that is part of the initial agreement with Delaware regarding yes, my transaction generally will contribute $175 million took like.
This contribution to black is a special commitment made as part of the Delaware approval process and in conjunction with the proposed transaction with national wide.
It's possible due to the one and a half billion dollar capital contribution committed as a part of that transaction.
Absent any contributions made to your five subsidiaries in connection with the closing of the ask my transaction. It is our intention to manage all of our U.S. life entities, including GLICNY on a standalone basis with no plans to infuse any additional capital.
The U.S. type businesses will rely on their consolidated statutory capital prudent management of enforced block and Actuarially justified rate actions to satisfy policyholder obligations.
Moving to the holding company.
With the Genworth, Canada fail to Brookfield complete we ended the quarter with approximately $1.5 billion in cash and liquid assets up from 366 million from the prior quarter.
During the quarter and depicted on page 17 at the Investor deck.
Proceeds to the holding company from the M.I., Canada sale were $1.2 billion with approximately 800 million remaining after paying off the term loan.
During the quarter the holding company also benefited from $334 million and dividends, which included $250 million from Wassa mine $34 million from Australia special dividend as well as Canada as ordinary and special pre close dividend at $59.
Intercompany tax payments, which were elevated this quarter due to timing of certain items, where source of cash at the holding company.
Other miscellaneous items, primarily driven by lower cash collateral from an up tick in interest rates increased during the quarter benefiting cash by approximately $12 million and finally offsetting these inflows during the quarter, where interest payment of $44 million.
As noted in my earlier remarks, falling quarter close we paid access $134 million plus attorney fees, and we fully redeemed at $397 million outstanding debt due in 2020, plus accrued and unpaid interest and make whole fees.
As we manage our liquidity and 2020 and beyond we're planning for the repayment ever intercompany note $200 million to Genworth life insurance company that is due in March 2020 possible incremental litigation expenses with Axa damages hearing taking place in Jan.
Approximately 1.1 billion in combined debt maturities in February in September 2021.
Before I conclude we continued to receive inbound investor questions regarding the underlying component of general values, we discussed on our second quarter 2019 call.
That's our fourth quarter results demonstrate our U.S. mortgage insurance subsidiary continues to be a strong business given the sustainability and favorable economic trends.
Underlying new business grows favorable loss performance and capital initiatives.
And with Australia has improved in value.
Peering at June Thirtyth, 2019 stock price to its closing trading price yesterday at $3.91 per share in Australian dollars.
For U.S. life, we believe it is appropriate for investors to continue to value this business euro given our installation actions.
As Tom said, we continue to believe that the issue my transaction is the best unless certain outcome for our shareholders, but wanted to provide an update on these perspective, given the inquiries we have received.
In closing it was a strong quarter for Genworth 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 at 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 helped stabilize or U.S. life insurance businesses.
With that let's open it up for questions.
Thank you, ladies and gentlemen, we will now begin each many portion of the call. As a reminder, please refrain from using cell phones speaker phones or headsets press star one to ask a question. If at any time. Your question has already been answered already we'd like to withdraw. Your question. Please press star to be to be removed from the Q. Please press star one now.
Our first question comes from Ryan Krueger with KBW. Please go ahead.
Hi, Good morning, I had a few questions first can you give us any indication of the potential size of the capital contribution that that New York is asking for and then I guess any more perspective on our.
Would you be willing to make some level of capital contribution to New York to get their approval, but just less than there are currently asking for.
So right 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 I would say is.
John Oceanwide in general are willing to return capital contribution.
The sizes to be determined and to be discussed with you work.
The one thing I would remind people is.
We GLIC.
And with life insurance company is the.
LTC policies, a little over a million policies and millions 40000 thing.
For for all 49 states and so the 49 states.
I have a interest in GLAIC and GLIC.
Capital position as part of their transaction. We did agree as you all know to put 175 million into GLIC try notional why didn't we agreed to that.
In the case in New York and their original approval they didn't ask for capital.
They are now and part of that is though you know clearly the fourth quarter review, though and discussions we're having.
One thing that I tried to say my remarks is.
Look needs much smaller than GLIC 76000 policies or when you work. So it's one state.
I think part of the challenge for Genworth and Oceanwide on one side to new work on the other side is it's just not the two parties because there's 49 other states and when I know the regulators, who also will have an opinion.
And so one of the things that we'd have to keep in mind is the the views of go aware, Virginia. There are two other lead states in the North Carolina, which you saw some light, but they all have LTC policies North Carolina.
Virginia, and Delaware and quick so the size of.
Any capital contribution obviously, it's important to New York they'll want more than less well, we do have to make sure it's reasonable given.
What we agreed to a for the 49 straight company.
Is that because the capital contribution would actually come from.
Quick.
Or with the capital contribution.
The company.
Hey, just want to make sure you now is there relative to what you agreed to put into Delaware.
What we're talking about would be a capital contribution from Genworth financial repair.
Okay and then my just last question.
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Yeah.
I guess related to the New York. So if you if you do get the approval from them.
Before March 31st would you be willing to extend the agreement beyond March 31st if you haven't received all the other approvals at that point or is that comment just specific to New York.
So another good question Ryan.
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 still a few pieces of financial information.
So that's relative to results for China Oceanwide.
In recent quarters and things, but I think if new York, if we could agree that without 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 remain.
Anything significant issue in China is they would have to clock.
To that have stayed administration or foreign exchange or save in terms of the 2.7 billion or paying too.
Purchase genworth, whereas a comfortable coming from and I.
Oh sure why does have significant excess cash in China.
And if they were able to use that you know that that would cover the purchase price. However.
This has been part of the filings for more than a year.
To the extent, that's 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, We agreed with New York accessible China Oceanwide acceptable other regulators were both ready to close and then we would just you know than China, Oceanwide, obviously is going to lead and discussions with safe.
So about where the funding comes from.
Therefore, we certainly our goal is to close by the end of the first quarter, we recognize that it's done three and a half years and we can't keep extending forever.
Got it thank you.
Thank you. Our next question comes from Josh West Rough well with Creditsights. Please go ahead.
Hi, Thank you good morning.
With regards what you were just mentioning.
The reason why you didn't regulatory approval from safe.
Is that a process I can only start once the U.S.
Like look.
I didn't quite get still ask of it.
So we repeat your question do you know what's great about its hard thing to.
Yeah sure sorry about that so with regard to try to oceanwide.
Quest <unk> approval from say for the currency conversion and purchase is that a process that can only star one the U.S. regulatory process has concluded.
So first of all that there have been or other China regulatory approvals.
Including where the NDRC is a and so that you know that was passed on.
I think the remaining issue is we'll save a chairman Lu and who's the owner of Oceanwide into the Ocean My management team I've been talking to all the regulators and others in China I have said in the past sort of thing because of the aging problem in China. If you read a lot of public commentary from.
The.
Several men and others in China, there is a significant elderly agent problems. So I do think generally China in the regulators or supporter of the deal I've talked to CBRC, which is the regulated or four or five times and they've always been supportive because of the genworth expertise.
So those safe save has been.
In touch with Oceanwide, along the way I think they know it it's it's hard for safe to make a final determination of you know what they're going to approve until they know.
What the final deal is.
I will say the none of the China regulators have asked for any concessions any accommodations on or deal over last three and a half years, the only concessions in combinations where from Genworth regulators. So first we had cfcs and you know that took 18 months.
And then we had the Delaware process and they wanted 175 million.
That was approved and then.
Then a us see wouldn't really gave 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 work so the 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 China, Oceanwide and chairman Lu because we both would've preferred to keep Genworth, Canada. It's a good company, but we were committed to do the deal.
And he did no bad if we couldn't get all the regulatory approvals were not getting we wouldn't give to one and a half billion from China, Oceanwide and we had the 397 million of debt due.
In June of 2020, we do have the Glip no, but I think Kelly talked about which is 200 million made a 170 535 million payment to access.
And we you know we have we did pay off.
Hundred million I've got together, that's a 2.8, so 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, where there's been more challenging in the U.S. blending any of the regulators. They they all have their own issues, obviously, either the geopolitical issues.
At the federal level, and then the space because let's face. It LTC is a challenge you know we still need we've gotten 12 and a half a billion 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.
Until he talked about it we've got more than 200% somebody goes up you know this was a 300. So again I do think in fairness to Delaware and do what they do see part of this as.
They know we're not that there's no deal, we're not putting capital in and if there is or deal on the close we're not putting capital into future. So there isn't an opportunity for the regulators to at least asked for capital and we Ben as I said, China, Oceanwide give them or how to grow that they've been opened in flexible to accommodate.
Various U.S. space regulators and also kinda, though.
But you know with New York It has to come down to is that our request want a reasonable and something that John with an ocean, whether comfortable with and then too.
His Delaware, Virginia, and all the other 49 regulars do they think whatever we committed to New York to get their approval is fair versus what we agreed to with quick given that quick as much a much larger company.
Yeah, I really appreciate all the stuff and regulatory complexity much.
Thank you we'll next go to Bill capillary fight speed partners.
Okay I'm going to try this again, if I did my numbers right, you're paying a big roughly $175 per coverage policy, which means that New York is roughly 13 million maybe call. It $15 billion you would that be itself is that kind of.
We weren't you're offering and they're asking for dramatically more Oh. That's my first question and my second question is are you talking to the staff or is it actually is.
It's actually coming directly from.
The director of the Oh DFS.
Thanks.
So good questions. Two part question will take the first part there there are different metrics you can use to compare the size of.
New York too.
The Delaware company.
One is lives and so it's 76000 2.040 million.
The other is relative capital and and since we haven't finished the statutory process yacht I'll go with 930 numbers at 930, the the capital in New York was around 300 million.
And the capital and where there was 2 billion. So if you do that basis 300 to 2 billion I think it's 15%.
Then if you looked a lot premiums.
Generally the premiums are higher per policy in New York then the other states because New York is more expensive for example, I think they average cost for a year and nursing home in New York is 125000 to national averages 100000.
So generally I think the agents in financial advisors, who sold those 76000 policies.
Generally.
I had the policyholders in New York by higher daily benefit of Moms. So therefore the.
The daily benefit amount per policy is higher in New York. So the premiums on average in New York Profire. So if you do premiums on the 76000 policyholders I'm using 2018.
Around the 240 million were the annual premiums and they too are the annual premiums and would it.
We're about 2.4 billion, so roughly 10%. So those are different metrics, we talked about different metrics different bases with New York and I'm not going to go into where we are within your but I, but I would say I think it doesn't matter ultimately.
I would just expect we are talking to Delaware, we're talking to Virginia.
Yeah, I talk to all 50 states all the time, because I'm I'm generally involved and 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 al the regulators that are part of like want this deal to happen because they see the benefits to their policyholders are those deal. There's no question about that and I think they understand that New York and we are discussing it Kelly talked about the nationwide experienced the New York only experience or how you view that.
What I will say is we have.
Total claims all time in New York or 13000.
Total claims all time for Genworth EUR 280000.
So we look at 13000 claims and 280000 claims and you project those in the next 30 years.
Clearly the the claim experience on 280000 as more credible more actuarially significant but the question. There was on the 13000. You know is is that that's been Kelly talked about this is that we are experiencing higher claims than a nationwide.
And you know, but with always 13000 claims we really don't know if that's fully credible I don't think the right way to really knows that either.
And if it is fully profitable at some point, we're gonna have to have premiums premium increases the cover that but it could also be that as the 13000 claims grow better reverts to me and the New York experience ends up looking more likely experience I'm just wondering if so that's a notable and it makes it a little bit complicated into these discussions.
In terms of what you think about the New York only experience.
And the nationwide and and you know.
Different people different actuaries, we have our actuaries they have there's gonna have different opinions on that so.
These are.
It's a cloud complex issue, but ultimately you know I think what we're trying to do is in China Oceanwide to general really want those deal to close I think all the other states one at the close I think you're like wants it to close but it comes down to what is a fair capital commitment to New York and were.
Flexible on that I think just trying to socialize and generally have shown flexibility. It's taken us a long time to go through all those things, but we felt flexibility but in the end it's got to be an amount that new York thinks is appropriate but there'll be other 49 regulators than it is appropriate.
And that is somewhat of a complex processes within that.
Understood. Thank you. This is very helpful. But so so this is still actuaries actuaries, which was still where you are in a process rather than.
The topic underway or 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 stuff that a new York.
Thank you.
Thank you. Our next question comes from drew Fig door with GE. Please go ahead.
I was curious reading through the report we saw come out yet a last night it seem that the margin testing is rather benign in terms of the long term care. So I'm curious what New York has found this year so concerning that they need to have capital injected.
But last year they were finding it 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.
Drew [noise] Jerry this is Kelly grouse, thanks to the question.
You know what I wouldn't what I wouldn't say about New York is we really just hadn't Barry emerging experience I mean, I think Tom mentioned about 13000 cumulated claims.
If you think about 13000 cumulative claims our view is that is like I mentioned in my prepared remarks that is incredible just given the fact, you've gotta look in different underwriting classes different genders different age groups of the folks in different policy series, because there were underwriting changes that occurred, but but we haven't seen as I mentioned.
And different experience and and particularly higher severity from some of those claims in New York, We don't quite view those is credible yet, but it is emerging and you know that's that the discussion. We're having now we're also under I try and you know a damn right now and so they're taking.
In a much deeper look at it and we're working with their group as a part of that examined and discussing that experience.
But you know when it is under discussion and we're working through the cash flow testing assumptions right. Now you did that answer your question.
Yeah.
Thank you thank you Gerry.
Thank you ladies and gentlemen, we have time for one final question from human Shoe show with Shah capital. Please go ahead.
Morning, Tom I.
I have a question on your plan B.
Do you think Genworth can get a 2 billion amod IPO in 40% to 50% of U.S. and <unk>.
In early Q2, if you cannot close this deal by the end of March.
So I'm on true a good morning. 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 a U.S. alike.
The only thing I would say is there our tax consequences depending on.
The amount of the IPO.
And so you could have significant tax friction depending on the size that you do.
I'm not going to try to value or U.S.. So my I think we disclosed today the the.
Book value for U.S. semis think it's around 3.8 billion.
There are comparable companies out there that are publicly traded.
You know that doesn't mean that we would trade the way they trade, but I think there a reasonable comparables and so I think <unk> for you I'm onto or other investors I think you have to look at our book value. It look up the earnings. The 2019 earnings were strong in rest of my 568 million. So there's five.
68 million, what could be comparable PE multiples. The book value is 3.8 looked at the comparable book, though I don't even come up with a view as to.
What do you think the values are but but I would say that and and I'm sure. You you know this and others know that when you when you go beyond a certain amount in the IPO.
Oh, you you could just create tax issues and also.
And again, we'll get the not getting at all the rules and et cetera.
Depending on how much you do.
You can prevent.
Future down the road opportunity to do a tax free spin off to John were shareholders. So I don't want to go into all the different alternatives I will tell you as I said in my script.
We we've extended the steel 13 times.
Every time, we extended the deal we valued what we thought China Oceanwide was worth it's pretty easy five four or three per share. It. We think it's the highest and it's certainly and most certain because it's just too specific price.
The other options, including the one you've talked about it has all part of the reviews. We've done all for the last three years and 13 times, we formally had board meetings, where we evaluated the ferry the the China Oceanwide deal.
Versus the other alternatives and we always concluded it was the best and most or if we aren't able to close a deal with China Oceanwide will look a bit alternatives include any alternative I'm not sure you just.
Talked about it certainly a reasonable alterable alternative.
It's feasible, what what you said, whether it's the best alternative I don't know the other thing and we are running on time, so I want to say to you until all the shareholders.
Kelly and I, Tim owns the head of our AR and others were always available to you know listen to your points of view on alternatives right. Now we are under merger agreement that you know doesn't expire to the end of the first quarter. So we can't really.
Consider any alternative we value all we can value them, but we can't consider it but if we decide which I think we'd be unfortunate for all stakeholders, including our shareholders not to do.
The China Oceanwide deal will the plan B will be the best value a that the board and management.
And our outside Advisors concludes is the next best plan B and we'll certainly take your input Hamas you and you and I've talked about this before and several others I'm sure. Several other shareholders have their own views on this.
And we want to redo, Kelly and I and others are Genworth management team and our board do care.
What you all think it'd be another 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 as Oceanwide. If we can't completed well look at the next best and most certain alternative.
Oh, the they stopped but the way the stock is trading at Ah you know for the last three years or so.
And especially today, it's clearly tells me that a the company should plan aggressively so plan b.
Thank you you know I think theres two ways to look at it Hum onto 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's the best option is to China, Oceanwide option, which is five for three years of stock has traded at discount.
And I think every time, a 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 bad but I do think investors recalibrate the probability of the China Oceanwide deal closing and so and I know it that's worth five four.
The three they all have the market has a view of what the Nexpress alternatives are and so I think when the stock goes down because we raised you know we want to be transparent that we're in negotiations with New York I think that means shareholders put a lower probability the oceanwide deal closing.
And I think the market is telling what I think it's going to Genworth board.
And management is we prefer or the Oceanwide deal we agree with you. It's the best the most certain deal.
Oh, we continue to get over 90% or support for all the directors on the board, including as a last December and so what you know when the stock falls. If you know we're watching it as you are I think it's falling because investors are reassessing the probability of oceanwide closing and its falling because.
The 543, perhaps they put a little a probability on that but I don't know you know that's the market.
But but 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 we'll move quickly.
The best plan B.
We'll talk to shareholders like yourself and get input and I you know I believe will ultimately a hold.
And in Investor Day. So we can talk of if we have to get through a plan b to talk about that and like I say walk whatever the point it'd be why we think it's the best but no shareholders have different views and.
Based on those views, we think another alternative is better and because in the yen. It's about whats them. The best long term shareholder value to shareholders and if there's another idea that were just better we've obviously we'd consider it.
So with that I'm sure you I appreciate that I do want to say to all the investors.
So we ran a little bit over 10 minutes is obviously a lot of questions on the deal. So we wanted to take some some of them.
But what Kelly and I are happy to continue the discussions with any shareholders, who on the who want to no give us their views or talk to US. Please contact him Owens, Illinois or.
Let me just some up can then I'll turn it back to dirt to end the call, but you know all of US a genworth one of the thank you for your questions and your continued investment in interest and Genworth.
As I've said, we're working hard to close the generational entrant transaction. We continue to believe it's the best to most certain outcome for our shareholders.
And all of the other stakeholders, but having said that I also wanted to be clear today that if we cannot complete stranger transaction. We are prepared to move forward with evaluating other alternatives and and the board and I and the management team.
Take very seriously or fiduciary duty to maximize the value to shareholders no matter, what ultimate outcome, we pursue so that Derek I'll turn the call back to you.
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 wind.
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