Genworth Financial Inc

NYSE:GNW

Earnings Call Transcript 2018-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to Genworth Financial's First Quarter 2018 Earnings Conference Call. My name is Daniel, and I will be your coordinator today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this conference call. As a reminder, the conference is being recorded for replay purposes. Also, we ask that you refrain from using cell phones, speaker phones or headsets during the Q&A portion of today's call.

I would now like to turn the presentation over to Tim Owen, Head of Investor Relations. Mr. Owen's, you may proceed.

[Tim Owens, Genworth Financial, Inc.]

Thank you, operator. Good morning, everyone, and thank you for joining Genworth's first quarter 2018 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 Groh, 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 Reports on Form 10-K as filed with the SEC. This morning's discussion also includes non-GAAP financial measures that we believe may be meaningful to investors. In our financial supplement, earnings release and investor materials, non- GAAP measures have been reconciled to GAAP where required in accordance with SEC rules. Also when we talk about the results of our international businesses, 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 statements.

And now, I'll turn the call over to our CEO, Tom McInerney.

[Thomas J. McInerney, Genworth Financial, Inc.]

Good morning and thank you for joining today's earnings call. Since our fourth quarter earnings call, we have announced several updates with respect to the pending sale of Oceanwide, as well as made progress against our ongoing strategic initiatives. Today we will like to provide you with an update on these initiatives and review our strong first quarter results. I will start by providing a brief overview of our financial performance, and update on the pending transaction with Oceanwide. Kelly will then provide a more in-depth update on our first quarter results, and additional information on our holding company liquidity. Following our prepared remarks we'll open the call to questions.

I am pleased with Genworth's strong first quarter operating performance. For the quarter adjusted operating income was $125 million or $0.25 per diluted share. Our mortgage insurance businesses had excellent results, with solid growth and strong capital levels in each of our global businesses. We also had very strong loss performance in our U.S. and Canada businesses. Starting with U.S. MI, first quarter adjusted operating income increased 52% year-over-year to $111 million, driven by insurance in force growth, strong loss performance and tax reform benefit. In Canada, excluding the impact of foreign currency, adjusted operating income increased 28% year-over-year to $49 million as we continue to experience a strong housing market and underlying economic conditions.

And in Australia, excluding the impact of foreign currency, adjusted operating income increased 38% year-over-year to $19 million with higher earned premiums in the quarter due in part to the updated earnings curve pattern. Our life insurance segment faced continued headwinds, generating an operating loss of $5 million driven by long term care insurance losses. However, these challenges were partially offset by continued traction on our multi-year long term care insurance rate action plan that we expect will continue as we move through 2018. As shown on slide 10 of the earnings presentation, Genworth continues to make significant progress on improving the performance of our legacy LTC policies.

There is significant leverage to Genworth's cash flow from these annual premium increases which are intended to cover our higher claims experience as the higher premiums are expected to be paid over decades into the future. We continue to seek additional annual premium increases on our in force policies under our multi-year rate action plan over the next five years to seven years, which we estimate will add an additional $8 billion of future cash flow to Genworth on a net present value basis. Let me now provide an update on the Oceanwide transaction. Since our last update, Genworth and Oceanwide have continued to work together on the required regulatory approvals and the closing conditions of our pending transaction.

In order to allow more time for regulatory reviews, Genworth and Oceanwide have extended a period for termination rights under the merger agreement to July 1, 2018. It is important to note that each time a merger agreement extension is considered, Genworth's board performs an evaluation to assess whether it is the best transaction for stockholders versus other secondary alternatives. Our board extended the merger agreement as it continues to believe that the Oceanwide transaction represents the best and most certain value for stockholders. Also during the first quarter, Oceanwide and Genworth received approval from regulators in Australia for the proposed transaction.

As we announced last week, Genworth and Oceanwide withdrew and re-filed their joint voluntary notice with the Committee on Foreign Investment in the United States or CFIUS, to provide them with additional time to review and discuss our proposed transaction. We are encouraged by the fact that CFIUS agreed to proceed directly to a 45-day investigation period following a one day review period. The re-filing enables us to continue our ongoing productive conversations with CFIUS about the additional data security risk mitigation proposal that we presented in February. We believe this proposal which involves a U.S. third-party service provider offers an effective solution for the safeguarding of the personal data of our policyholders.

The re-filing is a meaningful step in our process, and both Genworth and Oceanwide are fully committed to developing a risk mitigation plan that is acceptable to all parties. We have had extensive discussions with our Delaware regulator about the transaction, including the un-stacking of GLAIC for a purchase price of $700 million, which Oceanwide and Genworth believe is the fair market value of GLAIC. However, after discussing various valuation methodologies with Delaware, we were not successful in agreeing on a mutually acceptable fair market value. As a result, Genworth and Oceanwide are working with Delaware and other regulators to seek approval for a transaction with no un-stacking.

All parties are working constructively to finalize the changes required, and we'll complete the necessary amendments, the applicable regulatory filings in the near future. These amended filings are required for Delaware to schedule a hearing on the transaction. As a reminder the original structure of the transaction included a commitment by Oceanwide to contribute $525 million of capital to Genworth for the un-stacking at the closing of the transaction. Oceanwide will not make this capital contribution without the un-stacking. The original structure of this transaction also included a commitment by Oceanwide to contribute $600 million of capital to fund the retirement of Genworth's debt due in May 2018.

As previously announced, given the delay in closing the transaction, Genworth completed a $450 million secured term loan where an affiliate of Oceanwide was the lead investor with a $60 million allocation. Genworth will use the proceeds of this financing along with other cash on hand to retire the 2018 debt. Accordingly, Oceanwide will not contribute $600 million of capital for this purpose. Given these developments, Oceanwide and Genworth are currently developing a new capital investment plan, whereby Oceanwide would contribute an aggregate of $1.5 billion in capital to Genworth over time following the consummation of the transaction.

The primary reasons for pursuing the un-stacking were to create an additional dividend stream to the parent, to further isolate the LTC business from our other businesses, and to protect the ratings of our U.S. mortgage insurance business. After considering various alternatives, we believe the best use of Oceanwide's $1.5 billion contribution currently contemplated is to primarily focus on retiring the $1.5 billion of Genworth debt due in 2020 and 2021, or for other potential uses to improve the financial flexibility of Genworth, as well as to enable future growth opportunities once the debt is at a more manageable level.

We believe that a reduction in our debt to the $2 billion range will bring our financial leverage and debt service coverage ratios to a sustainable level. At that level, we believe dividends and cash flow from the three mortgage insurance platforms would be sufficient to service our remaining debt with comfortable cash flow margins. We also believe a reduction of debt to the $2 billion level will improve Genworth's ratings over time. This means the un-stacking of GLAIC would not be needed for debt service and the GLAIC cash flow can be used to strengthen the life companies for the benefit of policyholders. The parties expect to finalize this new capital plan in the near future. Additionally, we are in discussions with Virginia to determine how we will handle the $175 million that Genworth previously agreed to contribute to the un-stacking of GLAIC. We will provide an update in due course as we seek to finalize the intended use of the capital commitment and move forward with a review process with the regulators as quickly as possible.

Now, I will turn the call over to Kelly.

[Kelly L. Groh, Genworth Financial, Inc.]

Thanks, Tom and good morning everyone. Today I will cover our first quarter results and the key drivers as well as provide some context around cash sources and uses at our holding company. Let's begin with this quarter's financial performance. We reported net income for the quarter of $112 million, and adjusted operating income of $125 million. Our overall results reflected continued strong loss performance in our U.S. and Canadian mortgage insurance businesses. Our U.S. life insurance business results were mixed with strong fixed annuity performance offset by losses in long term care and life insurance. Our overall results did benefit from the recently passed Tax Cuts and Jobs Act, which lowered our effective tax rate to 21% for most of our U.S. businesses, and to 27% and 30% for our businesses in Canada and Australia to more closely reflect local rates in those countries.

This provided an overall after-tax earnings lift of approximately $15 million versus prior periods. The primary tax benefits come from our MI businesses with some additional tax expenses in U.S. life insurance and corporate. I will explain more when I discuss individual business results. While I do expect a benefit to recur in subsequent periods, the amount will vary due to changes in pre-tax income and our mix of income by our international businesses. Moving to our underwriting results for the quarter, we saw solid loss performance across all of our mortgage insurance businesses, reflecting steady economic growth, low unemployment levels, and strong housing trends in most regions. In U.S. MI, our first quarter loss ratio was 9%, which is down 13 points from the prior quarter and 8 points from the prior year.

The improvement is driven by lower new delinquencies, seasonally higher cures and favorable aging. Incremental losses in the quarter from last year's hurricanes were not material with these delinquencies continuing to perform consistent with our expectations. We are holding approximately $5 million of additional reserves for elevated delinquencies in the areas hit by hurricanes in 2017. Persistency continues to trend stronger, reflecting higher interest rates, which reduces refinancing driven lapses. The lower U.S. tax rate did improve earnings by approximately $20 million in the quarter versus prior periods.

New insurance written was $9 billion, down 12% sequentially, primarily from a seasonally smaller purchase origination market, and decreased refinance originations, but was up 18% versus the prior year primarily from the larger mortgage insurance market. Our mix of singles declined sequentially and versus the prior year due to our continued selective participation in the market. We continue to closely monitor our market share given our lower ratings than our competitors, as well as transaction uncertainty, but we are pleased that our strong capital levels and differentiated service and product offerings have served to mitigate some of this pressure as we expect our overall market share to be up modestly this quarter versus prior periods.

Turning to Canada, our Canadian mortgage insurance businesses loss ratio increased 4 points from the prior quarter to 13%, primarily reflecting a modest increase in severity of new delinquencies. While we are pleased that loss performance has been exceptionally strong, we do expect normalization of losses going forward, and are currently anticipating a full-year loss ratio in the 15% to 25% range, which is unchanged from our prior guidance. The territorial changes made with U.S. tax reform benefited earnings by approximately $6 million as the effective rate of approximately 27% now more closely reflects the Canadian corporate tax rate. Flow New Insurance Written in Canada increased 4% in the first quarter of 2018 versus the prior year. This is primarily due to a larger market with increased housing demand ahead of some of the regulatory changes that were effective in the beginning of 2018.

Moving to Australia, the loss ratio in the quarter was 30%. Excluding the earnings curve adjustment in the fourth quarter the loss ratio would have been up 2 points sequentially driven by delinquency aging and lower seasonal cures, and down 5 points versus the prior year driven by a higher level of earned premium. As a reminder, our Australia business completed a review of its premium earnings pattern in the fourth quarter of 2017, resulting in a cumulative adjustment of the unearned premium reserve that was applied retrospectively for U.S. GAAP accounting. As a result of these changes, earned premiums are expected to increase over the next several years compared to 2017, but then normalize thereafter as the premiums will be earned over a longer time horizon.

I do want to note that the U.S. GAAP treatment of the Australia earnings curve adjustment is different than IFRS in Australia, which adjusted the earnings curve prospectively versus retrospectively. This will result in differences in earned premiums, loss ratio metrics and earnings when the business reports locally. The U.S. GAAP benefit from tax reform was smaller for Australia versus Canada given their absolute level of earnings and higher local tax rate. The benefit during the quarter was between $2 million and $3 million. Our flow NIW business levels in Australia were down 19% sequentially due to seasonality and lower market penetration from certain lenders, and down 20% versus the prior year from a decline in market share.

Moving to our U.S. life insurance segment, our first quarter results generally reflected higher mortality across most of our products, benefiting our fixed annuity and long term care insurance lines, but negatively impacting our life insurance business. We continue to experience higher lapses versus our locked-in assumptions in term life, and also experienced higher claims severity in our long term care insurance or LTC business. In our LTC business, we did see seasonally higher existing claim and active policy terminations experience on our newer LTC blocks, which was offset by higher utilization of available benefits and lower earnings from the acquired block. While our overall existing claims experience has been favorable since claims reserve assumptions were updated in 2016, the benefit from higher claim terminations is being muted by unfavorable benefit utilization experience primarily on early duration claims. We are monitoring the trend in benefit utilization closely as it continues to develop.

Earnings on our acquired block were down sequentially due to a true-up for unfavorable new claims and termination experience from the prior quarter. While these results do reflect our best estimates, they are trued-up each quarter once the actuarial models are finalized. The change in the U.S. corporate tax rate drove long term care earnings lower by approximately $10 million in the first quarter. This impact is driven by losses that were taxed at a lower tax rate in the quarter and income from amortizing gains on forward starting swap that were settled prior to last year's tax rate change which were taxed at 35%. Only the amortized income from forward starting swap gains settled after 2017 will be at the new rate of 21%. This tax impact on swaps was approximately $5 million for the quarter and is expected to be roughly the same amount going forward for some time.

I would also like to provide some context on our expectations for our LTC business performance for the remainder of 2018. First, while claim termination levels can vary based on a number of factors, we generally expect and have experienced less favorable claim terminations in the second half of the year. Second, utilization updates made to our disabled life reserves are done on a rolling basis to reflect actual experience. As mentioned, we are seeing elevated trends versus our expectations in utilization, particularly in the early duration. We will continue to monitor this closely. Third, we expect to remain in quarterly reserve releases from reduced benefit elections from our in force rate actions in aggregate to be higher than the levels we saw in the first quarter of 2018 as the implementation of certain rate actions are expected to increase throughout the year.

Fourth, as discussed earlier, the differing tax treatment on amortization of our forward starting swaps will modestly increase income tax expense versus the 21% federal tax rate going forward. Lastly, we continue to anticipate a growth in new claim counts and higher severity as our blocks continue to age. Given these items and absent any impacts that could result from our annual review of the claims reserve assumptions and our annual margin testing in the second half of this year, we expect modest losses in LTC earnings in the remainder of 2018 with quarter-to-quarter variations depending on specific experience.

Turning to life insurance, universal life mortality was unfavorable versus the prior quarter, although partially offset with modest improvement in term life mortality. The term life business continues to be pressured from higher lapses primarily associated with the large 15-year and 20-year term life insurance blocks entering their post level premium periods, which result in lower premiums and accelerated write-offs of deferred acquisition costs. We expect this trend to continue to reduce after tax results by approximately $5 million per quarter during the remainder of 2018, and then increase in 2019 as the larger 20-year block reaches the end of the level premium period. In fixed annuity, we did see favorable mortality relative to recent trends in addition to the benefit from a lower tax rate.

Now, I'll move to capital levels, where our mortgage insurance businesses continue to maintain at very strong capital positions across all platforms. In U.S. MI, we finished the first quarter with a PMIERs sufficiency ratio of a 124%, or in excess of $600 million above the required assets, up from a 121% at the end of the fourth quarter, and a 118% at the end of the first quarter of 2017. This growth was primarily driven by solid business performance and positive cash flows that was partially offset by required assets on strong incremental new insurance written. We will continue to manage our PMIERs compliance with a prudent management buffer, and consider potential new GSE proposed capital standards we believe could be effective as early as 4Q 2018.

Given U.S. MI's continued strong performance and strengthened balance sheet with significant positive unassigned surplus, we have initiated conversations with the North Carolina regulator around resuming a dividend during 2018. In our Canada MI business, we saw an estimated capital ratio of a 170% in the quarter, which continues to remain above the company's operating MCT or minimum capital test range of 160% to 165%. In addition to their ordinary dividends, Canada MI completed CAD 50 million of share repurchases in the first quarter of 2018. That brought $50 million to the holding company as we participated on a pro-rata basis with our holding company's ownership percentage.

Our Australia MI business ended the quarter with an estimated capital ratio of 185%, which is above the high end of our prescribed capital amount management target range of 132% to 144%. Similar to Canada, Australia paid ordinary dividends in the first quarter of 2018, along with the completion of a share buyback program originally initiated in 2017. Australia also announced yesterday a new AUD 100 million on market share buyback, subject to shareholder approval. When completed, assuming participation on a pro rata basis, this could bring $35 million to $40 million to our holding company, depending on FX rates and market conditions over time.

Including the completed actions I just noted, we received a total of $71 million in net dividends and proceeds from repurchases from our international mortgage insurance subsidiaries during the quarter. Capital in Genworth Life Insurance Company or GLIC as measured by risk-based capital remains fairly consistent to the prior quarter and is estimated at approximately 280% on a company action level basis. As we noted last quarter, large drivers of our RBC decline from earlier 2017 levels were the non-economic revaluation of the deferred tax assets under the new tax law, and our New York entity or GLICNY cash flow testing results, which disallow unapproved future rate actions. We continue to have ongoing dialog with our New York regulator regarding our pending LTC rate action request. We are also continuing to follow the discussion with the NAIC and the ACLI regarding adjusting the after tax RBC factors to incorporate lower rates. While final RBC factors are not yet known, we expect the lower tax rate factors to reduce our RBC ratio.

Moving to the holding company, we ended the quarter with approximately $1.2 billion of cash and liquid assets. The increase over the prior quarter was driven by a number of factors including $441 million of proceeds net of issue discount and fees from our recently completed term loan, and $71 million of dividends from the operating companies I had just mentioned. This was partly offset by $62 million paid for debt interest expense, $26 million of intercompany tax payments, and $90 million of net other items and expenses including certain compensation expenses that trend higher in the first quarter and are mostly reimbursed by the businesses throughout the remaining quarters of the year. Note that the cash balance at quarter end includes approximately $600 million dedicated to pay the May 22 maturing debt.

Managing our debt levels and taking advantage of opportunities in the market continue to be a focus for us. Given that U.S. MI is preparing to resume a dividend, we have no additional debt maturities for more than two years, and we remain committed to deleverage our business. We are modestly lowering our targeted cash buffer to 2 times forward debt service versus our previous target of 1.5 times forward debt service plus $350 million. We will closely monitor this level going forward, but believe this is a prudent action that provides us flexibility going forward while still maintaining strong liquidity levels.

Also, as Tom mentioned, we are discussing a $1.5 billion capital investment plan with Oceanwide for reducing our debt levels subject to consummation of the merger, which we expect will improve our financial flexibility and ratings over time. This capital plan with the timing to be determined is an alternative to the original $600 million that was intended for the May 2018 debt maturity, and the $525 million earmarked for the U.S. life and stacking initiative given that these contributions won't be made because of the delay in the deal timing and expected changes to the un-stacking.

I do not expect any of this capital to be contributed to GLIC. As we have said previously, GLIC must rely upon the $2.7 billion of statutory capital within the company, prudent management of the in-force and regulators approving the actuarially justified LTC rate action plan to satisfy policyholder obligations. We have no current intentions to provide additional capital for this business, deleveraging is the main priority with this capital investment and we will be updating the market at the appropriate time. But something's up, I am very pleased with our global mortgage insurance performance along with the execution of our term loan which allows us to retire our May 2018 debt maturity given the delay in the transaction with Oceanwide. While our U.S. life business continues to be challenged, we remain focused on the operational progress including our LTC rate action plan and other strategic actions intended to improve this business.

With that, let's open it up for questions.

[Operator]

We can now take our first question. It comes from Ryan Krueger of KBW. Please go ahead sir.

[Ryan Krueger, Keefe, Bruyette & Woods, Inc.]

Hi, thanks. Good morning. First question on CFIUS, given the short-end review period this time, is it your expectation that they will make a final decision one way or another at the end of this review period?

[Thomas J. McInerney, Genworth Financial, Inc.]

Ryan, thanks for your question. The first thing I would say is, I think we're having productive conversations with CFIUS. And of course we're encouraged that they agreed to focus on the 45-day investigation period. I think the third-party U.S. data security provider has made a difference. But hard to tell where we'll end up. And at this point, obviously we can't give any assurances on where CFIUS will end up. We would hope that we will reach a conclusion by the end of this review period. But it is possible that it continues after that depending on where the conversations go.

[Ryan Krueger, Keefe, Bruyette & Woods, Inc.]

Got it. And then on Delaware, was the value of GLAIC the only heated (30:25) agreement that there was from Delaware in terms of approving the merger or were there other issues you need to work out as well?

[Thomas J. McInerney, Genworth Financial, Inc.]

Yeah. Ryan, another key question. I would say that Delaware, Virginia, North Carolina, New York are all states that have to approve the transaction, generally have been supportive of the transaction because of the capital benefits, and Kelly and I talked about the $1.5 billion that we're going to repurpose from Oceanwide in the new capital plan, but I think they are supportive of the deal. It has always been an issue because we – and I gave the reasons that we wanted to do the un-stacking, but we felt that the right value given the future cash flows and dividend stream for GLAIC was $700 million. Delaware and their advisor saw it differently. And while we tried to get to a meaningful place to do the un-stacking, we ultimately, Oceanwide and Genworth concluded that it made more sense to move forward at this point to no longer pursue the un-stacking and go forward with the transaction without that. We now have to redo the Form A filings in the states, go back to all the regulators with the new structure of the deal, but I'm confident that Delaware and Virginia, and the other regulators are comfortable with the transaction, and without the un-stacking.

[Ryan Krueger, Keefe, Bruyette & Woods, Inc.]

Thanks. And then one last one just on the comments that you have no intention to contribute additional capital to GLAIC, would that still be the case in a scenario where GLAIC's capital position deteriorates to the point that there was regulator intervention? Would it still be the position of the parent company that you would not put in additional capital in it in any circumstance?

[Thomas J. McInerney, Genworth Financial, Inc.]

We've had a lot of conversations with the regulators during the last three years to five years, and I think we've made it very clear, and I think they understand this that we've had a cumulative losses of $2.7 billion from the legacy books, we have $2.7 billion of capital in the companies, the life companies, and then that plus the future premium increases and good management of the in-force and the claims, we believe is sufficient to run the businesses going forward. And at this point given that and given the trends, and we are doing very well on our multi-year rate action plan as long as we stay on that, we think the capital ratios will be fine and above the minimums that you're talking about.

[Ryan Krueger, Keefe, Bruyette & Woods, Inc.]

Great. Thank you.

[Operator]

Thank you, sir. We may now move along to our next question. It comes from Sean Dargan of Wells Fargo. Your line is open, sir. Please go ahead.

[Sean Dargan, Wells Fargo Securities LLC]

Thanks and good morning. I have a question about the per share deal price. So in 2016, the way this was presented was that Oceanwide would be paying $5.43 per share. But presumably they would be receiving some sort of economic benefit from the de-stacking for which they were contributing $525 million. So I'm wondering, has the per share offer changed, and has there been some material change to the proposed acquisition that needs approval from, I guess, the parties involved?

[Thomas J. McInerney, Genworth Financial, Inc.]

So Sean, there has been no change to the purchase price. It remains $5.43 per share and that has been consistent since we signed the deal. Both Oceanwide and Genworth felt that the dividend stream from GLAIC in the future was important to service the debt. However, given that we couldn't agree on what we think is the fair market value at $700 million, paying more than $700 million given our projections of the dividend stream didn't make sense. And so we have had ongoing discussions with Oceanwide, Kelly and I with Chairman LU and others. And I think we've come up with a new capital plan, and so the $1.5 billion, and I think the primary uses for that will be to reduce debt.

But it can also be used to strengthen U.S. MI. There are opportunities in the U.S. MI and also in new business LTC. But the primary focus will be on the debt, and as I said, if we can get the debt down to the $2 billion range, then the debt service is significantly lower going forward, and the three MIs comfortably cover the debt service at a comfortable cash flow margin. And therefore, the dividend stream from GLAIC is needed. And so we were comfortable both Oceanwide and Genworth that the deal still makes sense for Oceanwide, and it's still a good deal for the value they're paying with no un-stacking.

[Sean Dargan, Wells Fargo Securities LLC]

Okay. And so that $1.5 billion that Oceanwide will contribute over time, that's roughly equal to the amount that they would have contributed in terms of debt retirement plus the consideration for de-stacking. Is that the way to think about it?

[Thomas J. McInerney, Genworth Financial, Inc.]

Well, so again the main reason that Genworth and Oceanwide felt it was important for Oceanwide to contribute capital was primarily focused on improving the ratings, particularly for U.S. MI. And so the original capital investment was $600 million to retire the 2018 debt, and $525 million is to the un-stacking. Obviously we're covering the debt through the secured term loan that Kelly and the team accomplished, and we're not doing the un-stacking. But we still need to focus on improving the ratings, and that has long term strategic value, significant value for Oceanwide. And so I think the way to look at it is, they're paying $2.7 billion for the company that goes to our shareholders. We think it's the best and most certain value for shareholders versus the other alternatives. And the $1.5 billion that they're investing to primarily improve the ratings, particularly at U.S. MI, which would help us compete in the marketplace and get back to the market share we'd like to be at, all of those things add value to the company. And so I think the way Oceanwide and Genworth look at it is, we're improving the long term value of the company, and that's worth it to Oceanwide to make those contributions.

[Sean Dargan, Wells Fargo Securities LLC]

Thank you.

[Operator]

Thank you, sir. We now move along to our next question. It comes from Tom Gallagher of Evercore. Your line is open, sir. Please go ahead.

[Thomas Gallagher, Evercore Group LLC]

Good morning. So Tom, I just want to be sure I understand the new situation with Delaware and exactly what they're going to be voting on from an approval standpoint. So is it fair to say whether it's implicit or explicit that any capital generated by the life and annuity business going forward is going to stay within the legal entities for their foreseeable future to potentially fund any future capital needs for long term care? Is that the right way, is that essentially what Delaware is going to be voting on? Because I would think they'd be fine with that, but I just want to make sure that I have that right.

[Thomas J. McInerney, Genworth Financial, Inc.]

Tom, that's a great question, and I think your hypothesis is right, that we're not going to do the un-stacking. So any cash – so GLAIC will still be 100% owned by GLIC. So any future dividends from GLAIC over time will remain in the life company families. And again, the $2.7 billion of capital that there are now, the capital generated from the life and annuity business plus the future premium increases will all be used to support the claims paying for all the products that we have. And I think the regulators are comfortable with that.

And they also realized that while we needed GLAIC, if we are on our own to help with the debt service, the $3.6 billion debt that basically will have outstanding once we retire the 2018, that was an important stream. Now, because of the capital support from Oceanwide which we don't have without the deal, it's a big benefit for policyholders because now we don't need the GLAIC future cash flow, and it can be used as you suggested to support the life companies, and most importantly from a regulators' perspective, the policyholders. So that's why I think the regulators are comfortable with the deal, they have always been, and I think they will support moving forward with no un-stacking.

[Thomas Gallagher, Evercore Group LLC]

Okay. And would you say that, is there now a clear path to Delaware holding and hearing before the CFIUS makes a determination, or are they still waiting on CFIUS before, or are they just independent at this point in terms of the paths?

[Thomas J. McInerney, Genworth Financial, Inc.]

Another set of good questions, Tom. There's no connection between the CFIUS and the other regulators. They're all doing their own regulatory process. Obviously, whatever we decide with one regulator could affect other regulators. So you have to take that into account. But now what our legal teams are going to have to do working with the businesses is reform the deal to update and re-file the Form A filings that we've made to change the deal with no un-stacking and a different capital commitment. So we will be re-filing all of that. That probably will take several weeks. Once that goes in, I think Delaware and the other regulators will look at it. And then at some point, Delaware will make an announcement; hopefully set a hearing date, usually that's 30 days ahead. And so it's hard to say when we'll get through that process. Obviously, as you know, we extended the merger agreement date to July 1. So that's our current view as to when we think we can get the deal done.

[Thomas Gallagher, Evercore Group LLC]

Okay. And then just a few other quick ones from me. The commentary around the development expectations in the small loss for 2018 that were laid out for long term care, I went through, I got those points. Is that going to be a GAAP only issue, or do you expect that to have a similar negative impact for statutory and cash for 2018?

[Kelly L. Groh, Genworth Financial, Inc.]

Great question, Tom. Regarding cash, I'm not really considering that because of the lack of dividends to the holding company, or as we think about it from a holding company perspective, this is Kelly by the way. And on the statutory side, we do expect small losses on the statutory side as well. One thing to remind you, when I mentioned this in my prepared remarks on long term care in New York, we do have an active re-filing with New York. We did put up additional cash flow testing reserves at year-end. And what we had guided to on that is, if the regulators approve that, we wouldn't have to put up our additional cash flow testing reserves associated with New York based on those facts.

[Thomas Gallagher, Evercore Group LLC]

Okay. Thanks. And then – sorry, one final one. Just given what's going on in Delaware in the life annuity and long term care situation, do you still feel really good that you won't have any coordination between the state and regulators over your other businesses limiting dividend flow to the holding companies? Like, do you still feel very good that they're unrelated, or is there some risk here that at some point there could be coordination among the states and restrict dividend flows?

[Thomas J. McInerney, Genworth Financial, Inc.]

I think that's a difficult question to answer. Obviously, the states do work together over time, but it's our intention that using the $1.5 billion capital plan that we're working on with Oceanwide will get the debt to a level in the $2 billion range. We may use some of that for other purposes. And at that level the three MIs comfortably cover the debt service by a comfortable margin. We hope from a rating perspective, that given the cash flow coverage, debt to leverage will get to a much better place that that will allow for upgrades to the companies.

And then on the life side, the three companies together, I mean our plan is to have all of the future profits, capital generated by GLAIC or potentially GLIC and GLICNY, if we get the premium increases we need, all of that will remain in those life companies to be used to pay the claims for life annuity and long-term care. So from a regulatory perspective, I think this deal is a very strong deal, because we now don't need the cash flow from GLAIC to service the debt, because we have the capital plan that will help us manage it to level where the MIs alone provide enough cash flow for the company.

[Kelly L. Groh, Genworth Financial, Inc.]

Yeah. And Tom, this is Kelly. The thing I would add to that as well is just you've got to look at the capital ratios within each of our three MI businesses. They're so incredibly strong, Australia at 185% versus our target of 132% to 144%, just got approved for $100 million share buyback given the fact that they had such strong capital levels; Canada knocking it out of the park there frankly, and U.S. MI with greater than $600 million over the current PMIERs standards. We're obviously watching what updates will occur to that, and we'll evaluate that, but we do expect to get a dividend out from U.S MI in 2018.

[Thomas Gallagher, Evercore Group LLC]

Okay. Thanks.

[Operator]

Thank you. We can now move along to our next question. It comes from Geoffrey Dunn of Dowling & Partners. Your line is open. Please go ahead, sir.

[Geoffrey Murray Dunn, Dowling & Partners Securities LLC]

Thank you. Good morning. Tom, I just want to clarify, previously you said the deal price per share is not shifting, but you're still working on a plan with China Oceanwide. So is the plan still in process, but definitively you can say that that share price offer is not changing?

[Thomas J. McInerney, Genworth Financial, Inc.]

The share price is not changing, still remain at $5.43 per share. What we're working on is the $1.5 billion capital plan, and that will also require discussions with the rating agencies. We obviously want to maximize – both Genworth and Oceanwide want to maximize how we use that $1.5 billion to get the maximum benefit, hopefully upgrading the ratings. And the rating that's most important is U.S. MI because U.S. MI's rating because of the drag and connection with LTC is below where it would be on its own, and below where it is against its competitor. So I think both Oceanwide and Genworth see a significant opportunity to doing all we can. We're working with the rating agencies to make maximum benefit of that plan, and we hope to ultimately, that should, getting the debt down, cash flow coverage up, should help the rating of the parent, but also we think it will make a meaningful positive impact for U.S. MI, its rating over time.

[Geoffrey Murray Dunn, Dowling & Partners Securities LLC]

Okay. And (47:47) out of this discussion today, can you discuss your decision to reduce but not fully match MGIC's new pricing on the BP (47:56) monthly side? And also do you think that there is an opportunity or demand in the market for black box pricing at more of the community and regional bank level?

[Kevin D. Schneider, Genworth Financial, Inc.]

Geoff, this is Kevin. I'll take that. I think the decision to make the pricing move that we did in the market was driven by a handful of things. Number one, we had realized significant benefits from the tax law changes, benefits that absolutely helped margins across the industry and across the space significantly. Over time, I think those – you just can't expect the margins we are earning on those books of business where it would be sustainable on a go-forward basis at that pricing. It will just attract additional capital to the space, into the marketplace and ultimately will be competed down. Our business is a very competitive business. We got to earn our loans that we win every single day. And therefore we have to be responsive to competitor change in the marketplace.

We think because of where we started with the benefit from the taxes, the changes that we made over, following with our price increase, they largely align very similarly with where MGIC went. The only difference we did, we think, was to provide a little bit of additional refinement on the edges regarding a couple of sort of key risk drivers for our business and places where we were seeing in the amount of loans that were being delivered some increases in those risk attributes. So for us, we think it is both in the debt to income level, and the co-borrowers standard that we introduced into our rate cards, those more appropriately reflect what we expect the experience of those cohorts to be, and we thought that given that there was an opportunity for a re-filing at this point in time, it was important to get those out.

And from my perspective it sort of leads into your second question, we did it in a transparent basis. We've been trying to be – to provide as much transparency to the market, to our customers, to the consumers, to the analyst community as possible around how we price our business. And so whether this market ultimately goes into sort of a two-tier type approach, where some of it is just straight transparent rate card, or some of it becomes a black box approach as you described it, I don't know where that's going to end up. But where we would like to air, and what our focus has been in both our public statements and in the way we're operating in the marketplace is to provide a clear transparent rate card that the lenders can deal with and operate with, and hopefully to provide, I guess, some continuity in the overall pricing in the marketplace.

[Geoffrey Murray Dunn, Dowling & Partners Securities LLC]

Yeah. Thank you.

[Operator]

Thank you. We can now move along to our next question. It comes from Joshua Esterov of CreditSights. Your line is open. Please go ahead.

[Josh Esterov, CreditSights, Inc.]

Yeah. Thank you very much. Good morning. Will the shift in strategy with regards to de-stacking of GLAIC require a new merger agreement with the new shareholder vote given that de-stacking was a precondition for deal closing? And tied to that since this does require a new Form A filings with state regulators, does that suggest you may need to re-file with CFIUS again in the future to reflect new deal terms?

[Thomas J. McInerney, Genworth Financial, Inc.]

Good questions. Based on advice from our counsel, we do not think the changes to the structure of the deal require a shareholder vote. And clearly, the change will impact all the Form A filings. And so for the state regulators, they'll have to consider the deal with the changes. And as I said, I feel confident that this is still a deal that the state regulators will be very comfortable with. The focus at CFIUS, and I can't really get into the specific process because it's confidential, but they're really not looking at the financial aspects of the deal. Their whole focus is on national security interests. And again, I'm not allowed to go into detail on that, but their whole focus is that, and we believe with the U.S. third-party data security firm that we have, that's made a meaningful difference with CFIUS, and so the issue there is those national security issues. So the un-stacking or no un-stacking or the change of the capital commitment is not part of anything that they are considering.

[Josh Esterov, CreditSights, Inc.]

Got it. Thank you very much.

[Operator]

Thank you. We can now move along to our next question. It comes from Peter Troisi of Barclays. Your line is open. Please go ahead.

[Peter Troisi, Barclays Capital, Inc.]

Thanks. Good morning. So you presented a plan for how you will address the 2020 and 2021 maturities based on the new capital plan. But that of course assumes that you receive all regulatory approvals for the acquisition. So if you're not successful in getting the regulatory approvals, can you just help us think about how you will address those maturities over the next couple of years and the cadence of asset sales and/or additional financings?

[Thomas J. McInerney, Genworth Financial, Inc.]

So Peter, that's a good question. It's one that we get asked a lot. I would say we're 100% focused on the Oceanwide deal. And I think we're going to do all we can to get it done. And I think things generally are moving in a good direction, particularly with the state regulators. We have obviously, and I said this in my comments, every time we extend the length of the deal, we just extended it to July 1, the board looks at this deal compared to the alternatives, and there are a number of alternatives that we're looking at. And so I think if we – and we believe this deal is the best deal in my personal opinion by significant margin, basically provides the best and most certain value. But if we're unable to receive regulatory approval and we can no longer move forward with this deal, we will look at those alternatives in the 10-K. I'll refer you to the language that we describe those considerations and what some of those alternatives are, some of which would be, to reduce the debt is asset sales, et cetera. So we have a plan B and C and D and which one of those we'd go for will depend on market conditions at that time. However, we're really 100% focused on getting this deal done. Basically, we think it's the best for particularly for stockholders, but for all of our stakeholders.

[Kelly L. Groh, Genworth Financial, Inc.]

And Peter, this is Kelly. Another thing I'd like to add is the fact that we don't have a debt maturity due until June of 2020. We are not a forced seller in this market. We've got three strong MI businesses with good dividend capacity to meet our debt service. And to just add on to what Tom said, I don't think, I think we can optimize the value of Genworth for our shareholders by being patient and making sure that we're doing the right thing and looking at things very methodically given the market condition.

[Peter Troisi, Barclays Capital, Inc.]

Okay. Thanks. Thanks for that. And maybe just one more from me. Holding company miscellaneous expenses look like they're about $90 million in the quarter. Is there any seasonality to that number? Looks like in the slide that you called out compensation benefits as a driver, so I'm wondering if compensation caused some seasonality in that $90 million expense this quarter.

[Kelly L. Groh, Genworth Financial, Inc.]

Thanks for the question Peter. It's a great question. I did address it a little bit in my prepared remarks because first quarter of every year we generally have this phenomenon, what we see is outflows related to pension contributions, a variety of different employee benefit type things that occur in the first quarter that we didn't get reimbursed for the rest of the year. So in terms of thinking it on a go forward basis, probably about two-thirds of that amount or three-quarters of that amount was those employee benefit type costs. And then we would expect the net holdco other items to be modestly positive on balance for the remainder of the year.

[Peter Troisi, Barclays Capital, Inc.]

Okay. Thanks. And that two-thirds to three-quarters that you mentioned, that'll be fully reimbursed later in the year?

[Kelly L. Groh, Genworth Financial, Inc.]

Yes, it will.

[Peter Troisi, Barclays Capital, Inc.]

Okay. Thanks, Kelly. That's all from me.

[Kelly L. Groh, Genworth Financial, Inc.]

Sure.

[Operator]

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

[Thomas J. McInerney, Genworth Financial, Inc.]

Thank you very much, Daniel. I love your accent. And thanks to all of you for your time and questions today. In summary, Genworth continues to deliver strong financial and operating performance, particularly in the three MI platforms, and we're also working hard to close the transaction with Oceanwide as soon as possible, which as we've said we believe is in the best interest of our stockholders. We're focused on making progress towards the closing the transaction, and we'll continue to update you as often as we can. But thank you for your continued interest in Genworth and that will end the call.

[Operator]

That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.