Genworth Financial Inc

NYSE:GNW

Earnings Call Transcript 2019-Q4

[Operator]

Good morning ladies and gentlemen and welcome to Genworth Financial’s fourth quarter 2019 earnings conference call. My name is Derek and I will be your coordinator today. At this time, participants are in listen-only mode. We will facilitate a question and answer session towards the end of this conference call. As a reminder, this conference is being recorded for replay purposes. Also, we ask that you refrain from using cell phones, speakerphones, or headsets during the Q&A portion of today’s call.

I would now like to turn the presentation over to Tim Owens, Vice President of Investor Relations. Mr. Owens, you may proceed.

[Tim Owens, Vice President, Investor Relations]

Thank you Operator. Good morning everyone and thank you for joining Genworth’s fourth quarter 2019 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 report on Form 10-K as filed with the SEC.

This morning’s discussion also includes non-GAAP financial measures that we believe may be meaningful to investors. In our financial supplement, earnings release and investor materials, non-GAAP measures have been reconciled to GAAP where required in accordance with SEC rules. Also, when we talk about results of our Australia business, please note that all percentage changes exclude the impact of foreign exchange. Finally, references to statutory results are estimates due to the timing of the filing of the statutory results.

Now I’ll turn the call over to our CEO, Tom McInerney.

[Tom McInerney, President, Chief Executive Officer]

Good morning and thank you for joining today’s call. Today I will focus my remarks on the status of our pending transaction with Oceanwide.

As we have previously discussed, including during the December 12, 2019 Genworth annual shareholders meeting, after the successful closing of the sale of the company’s interest in Genworth Canada for approximately $1.8 billion, the two key remaining Genworth approvals for the China Oceanwide transaction are from the GSCs and the New York regulator, the New York Department of Financial Services. These regulators had previously approved the Oceanwide transaction, but because of the transaction closing delay given the time it took to complete the Genworth Canada sale, their respective approvals expired. The GSCs and FHFA, their regulator, have re-approved the transaction, leaving New York’s approval as the most significant remaining Genworth approval.

Genworth and New York have been engaged for months in discussions regarding the fourth quarter ’19 assumption review for Genworth Life Insurance Company of New York, or GLICNY, and the re-approval of the transaction. As part of the discussion process, New York has recently told China Oceanwide and Genworth that the re-approval would be conditioned on a capital contribution by Genworth Financial to GLICNY. The parties may or may not be able to reach a mutually acceptable compromise and any capital contribution to GLICNY would require Oceanwide’s consent under the merger agreement.

Genworth shareholders and other stakeholders are well aware of the many concessions China Oceanwide and Genworth have made to various Genworth regulators since the transaction was announced three-plus years ago. These concessions and the willingness of China Oceanwide and Genworth to continue this process for more than three years make it very clear how committed we both are to the transaction. As we have said many times, the Genworth board and I believe the transaction is the best and most certain strategic alternative for Genworth shareholders. It’s also the best option for other stakeholders, including our policyholders, employees, and the communities we serve.

Because of the comprehensive benefits of the transaction to our respective shareholders and all stakeholders, China Oceanwide and Genworth have been willing to consider transaction changes and regulatory accommodations to move the transaction forward. China Oceanwide and Genworth are acutely aware of the careful balance we need to strike to accommodate each regulator while also making the overall transaction fair and accessible to all regulators and the stakeholders they represent.

In the case of the key state insurance regulators that must formally approve the transaction, their primary criterion is whether or not the transaction is in the best interests of their respective policyholders. They do not consider the interests of shareholders and bond holders. We have six state insurance regulators who must approve the transaction. We have approvals from five of the six state insurance departments. I would note that China Oceanwide and Genworth are in the process of providing some regulators additional information that they can confirm their approvals.

The Delaware Department of Insurance is the key regulator for Genworth Life Insurance Company, or GLIC. GLIC is the Genworth life subsidiary that is the insurer of over one million LTC policies across 49 states and the District of Columbia. By contrast, GLICNY has approximately 76,000 LTC policies outstanding to New York policyholders. As part of the December 2018 approval process with Delaware, China Oceanwide and Genworth agreed to contribute $175 million of capital to GLIC upon the closing of the transaction.

I want to remind everyone listening on the call that we believe the policyholders of GLICNY and GLIC are clearly benefited by the Oceanwide transaction. Regardless of the capital amount agreed upon with the respective regulators, Genworth’s capital contributions to either GLICNY or GLIC are only being contemplated because of the $1.5 billion of additional capital China Oceanwide is contributing to Genworth. Genworth is not going to make a contribution to either subsidiary in the absence of the transaction

China Oceanwide and Genworth have made this point repeatedly to all regulators from the very beginning of our discussions, which started in 2016. China Oceanwide and Genworth will continue to engage with New York; however, if we believe that we cannot reach an agreement with New York that is also acceptable to other state insurance regulators by the end of March, Genworth will likely need to move on and each party will have to weigh alternatives.

During the last three-plus years, shareholders and other stakeholders have asked us about Genworth’s alternative scenarios. The Genworth board has evaluated the shareholder value of the China Oceanwide transaction against many other alternatives during the last three years. Each time we extended the merger agreement, the Genworth board, Genworth management and our external financial and other advisors evaluated the transaction’s shareholder value against value in these other options. Each time the Genworth management discussed the Oceanwide transaction with the board, we believed it was the best and most certain alternative for shareholders and all stakeholders, including policyholders. Perhaps the best evidence to support this view is the current discount of Genworth’s share price to the $5.43 per share offer from China Oceanwide.

Genworth is prepared to move forward with the best Plan B if we are unable to reach an agreement with New York that is also acceptable to China Oceanwide. Like in the case of the China Oceanwide transaction, our objective in any alternative plan will be to create the most long-term value for shareholders and other stakeholders.

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

The following action steps completed by Genworth during the last few years were consistent with actions steps we would like need to take in other alternatives. First, we refinanced the $597 million of senior debt due on May 22, 2018 with cash on hand and the secured debt financing we issued on March 7, 2018. Second, we received two consents from bond holders to further isolate the life companies from USMI. Third, we sold Genworth 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 25, 2017 in connection with the March 7, 2017 meeting to approve the China Oceanwide transaction, Genworth’s other alternatives, including selling one or more of our mortgage insurance assets to reduce debt as required to improve Genworth’s financial strength and financial flexibility.

Fourth, part of the proceeds from the Genworth Canada sale have been used to retire Genworth’s $445 million 2018 secured debt and Genworth’s $397 million senior debt due in June 2020. As a result, as of today Genworth’s public debt has been reduced from approximately $3.6 billion to approximately $2.8 billion.

Fifth, as of the recent debt reduction, Genworth Financial’s cash position is approximately $1 billion. This represents approximately $600 million above our cash target and provides a significant resource for Genworth to continue to reduce its parent debt 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 in connection with the AXA litigation, which Kelly will discuss in her remarks.

We are very fortunate to have China Oceanwide as our strategic partner in the larger transaction. While we both have been 100% committed to closing the transaction, China Oceanwide allowed Genworth to implement a significant number of steps over the last three years that Genworth would like have had to complete if the transaction was terminated. Although shareholders are unhappy with how long this deal process has taken to date, and rightly so, shareholders should be pleased that China Oceanwide allowed Genworth to implement these five major steps. The Genworth board and I are very thankful for Chairman Lu’s and China Oceanwide’s patience and flexibility at every step Genworth has had to take over the last three years.

If we receive New York approval and complete the other steps necessary in order to close the Oceanwide transaction, we plan on closing this transaction by March 31, 2020. If we do not receive New York’s approval and have to terminate the transaction, Genworth will use the following principles in choosing the best alternative Plan B: create the most long-term value for shareholders and other stakeholders; build on the five steps we have already completed; weigh the execution risk of alternative options and their likelihood of success; consider the best possible options for Genworth Australia, or GMA, and U.S. Mortgage Insurance, or USMI consistent with creating the most long-term value; use any potential additional cash proceeds generated by possible future options to protect long-term shareholder value, which could include further debt reductions or returning capital to Genworth shareholders; protect USMI’s financial strength rating which is absolutely critical to protecting and enhancing USMI’s long-term value for our shareholders; and finally, if we are unable to close the Oceanwide transaction, we will announce our go-forward strategy and engage with investors directly to discuss our plans. Through this engagement process, we will be open to shareholder 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 under the China Oceanwide transaction or any Plan B alternative. We continue to make progress under our multi-year LTC premium rate action program, or MYRA. As of the end of 2019, Genworth has achieved cumulative approved LTC premium increases equivalent to $12.5 billion on a net present value basis and an increase of $2 billion over year-end 2018. I believe it is extremely important to all of our policyholders and state regulators that Genworth remain financially stable in order to continue to service its 1.1 million LTC policyholders as well as continue this necessary and successful rate increase program that will enable Genworth to meet its future obligations to our LTC policyholders.

With that, I will turn the call over to Kelly who will provide a more complete discussion of the fourth quarter ’19 assumption review process and LTC cash flow testing, as well as review our strong 2019 results and current capital position.

[Kelly Groh]

Thanks Tom and good morning everyone. Today I will cover our fourth quarter financial results and our annual assumption review. I will also discuss capital levels in our businesses and provide updates on cash and flexibility at our holding company now that we have completed the Genworth Canada sale and subsequently retired approximately $840 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 disposition of Genworth Canada. During the quarter, we recognized a net loss from discontinued operations comprised mainly of two pieces: one, $57 million of income primarily from Genworth Canada, which included a favorable tax adjustment as we refined our tax position related to the divestiture that closed in December; and two, a charge in the amount of $110 million after tax related to Genworth’s former payment protection insurance business which was sold to AXA in 2015. This followed a U.K. court ruling in early December 2019. The charge covers an interim payment made in January with respect to any damages which could be awarded following a June damages hearing.

While not common in the U.S., interim payments are common in the U.K. legal system prior to damages being determined. We have initiated the process for appealing certain aspects of the December ruling. At this time, we are uncertain of the ultimate outcome of our appeal and the June damages hearing, and we are also unable to estimate additional amounts that may be due or demanded under a ruling. To date, AXA has submitted to us invoices claiming aggregate losses on payments to customers of approximately £430 million, which may be amended prior to the damages hearing. AXA is also seeking a tax gross-up on the amount invoiced.

We have not yet determined the validity of the specific claims on the invoice amount submitted to us, nor the appropriateness of a tax gross-up. Damages will be the subject of the June hearing.

Turning back to earnings, we reported a net loss available to Genworth shareholders for the quarter of $17 million and 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 $420 million versus a loss of $5 million in 2018.

Our mortgage insurance businesses continue to perform well with strong loss ratio performance in the U.S. and very solid capital levels in both platforms. Our U.S. life results were mixed, driven primarily by an assumption update on universal life insurance related to lower interest rate assumptions in addition to a few other items. Total UL charges reduced earnings by $139 million but were partly offset by continuing strong in-force rate action results in long-term care insurance.

In USMI, overall results continue to reflect solid fundamentals, including low interest rates, steady economic growth, low unemployment, and stable housing prices. USMI’s adjusted operating income was $160 million in the quarter, which was up $23 million sequentially and $36 million versus the prior year. Results in the quarter did reflect positive updates to unearned premium reserves and loss reserves of $11 million after tax and $10 million after tax respectively. Both updates reflect sustained underlying fundamental performance and the lower interest rate environment.

The fourth quarter reported loss ratio was 4%, which is down seven points from the prior quarter and down three points versus the prior year. The earnings curve and reserve updates in the quarter reduced the loss ratio by six points.

New delinquencies for the quarter were up modestly on a sequential basis, reflecting seasonality and up year-over-year with the larger in-force portfolio. Favorability and net cures and aging continued but did moderate from the first half of the year, driven by seasonal trends. Primary insurance in force in the USMI continues to grow, reaching its all-time high of $192 billion at the end of fourth quarter 2019. This is up 15% versus last year and reflects a very strong level of new insurance written, offsetting lower persistency from elevated refinancing activity given the dip in rates.

The U.S. mortgage origination market remains strong and was up versus the prior year form higher purchase originations and refinancing. Our flow new insurance written, or NIW for the quarter was $18.1 billion, down 4% sequentially and up 95% versus the prior year. We expect our USMI fourth quarter 2019 estimated market share to have remained strong. We continue to manage to an overall return expectation in the mid teens on the 2019 book year.

Moving to Australia, we have been closing following the tragic bush fires. At this time, we do not believe there will be any meaningful impact to the business and our exposure would most likely be limited to any economic downturn that may occur in the impacted regions. We are working with our lender partners to assist farmers who may be experiencing hardships as a result of the fires, and we could see a temporary uptick in delinquencies in the coming months followed by a higher rate of cures, as we have seen in past natural disaster events.

Regarding Australia’s financial performance for the quarter, our flow new business levels were up 9% versus the prior quarter and 28% versus the prior year, primarily from recovery in the higher LTB markets and larger mortgage origination volumes 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.

The U.S. GAAP loss ratio for the quarter was 30%, down six points versus the prior quarter primarily from seasonally lower new delinquencies net of cures, and up one point versus the prior year. On Australia’s IFRS accounting basis, the loss ratio of 41% in the quarter and full-year loss ratio of 51% was in line with the full-year 2019 loss ratio expectations of 45% to 55%.

Consistent with last year, our mortgage insurance business in Australia evaluated its premium earnings recognition pattern during the fourth quarter, which concluded with no recommended changes.

Turning to our U.S. life insurance segment, we completed our annual review of GAAP active life margins in the fourth quarter. The results of our testing for the total long-term care block or policies written since late 1995, as well as the acquired block or policies written prior to late 1995, was 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 assumptions in a moment.

Regarding quarterly financial performance, we continue to see positive adjusted operating income in long-term care driven by strong results with our multi-year rate action plan. Plan terminations continued to be seasonally lower for the second half of the year. Benefit utilization rates on existing claims, which are updated each quarter on a rolling basis, had a slightly favorable impact on earnings for the quarter but not as favorable as in the prior quarter. New long-term care continued to reflect higher claim counts on our larger Choice 1 and Choice 2 blocks, which we expect as those blocks age. However, we did see favorable development on incurred but not reported, or IBNR claims during the quarter which more than offset the incremental new claims expense.

The overall benefits of the in-force rate actions for long-term care, particularly the reduced benefit impacts, as illustrated on Page 11 of the investor deck released this morning, continue to be strong. This is primarily related to the recent rate increases in some of the larger states which are now being implemented. As Tom noted, our 2019 approvals on a net present value basis are expected to be worth approximately $2 billion in margin improvement.

As we discussed last quarter, these rate action approvals included expanded reduced benefit and stable premium options which continue to be selected at a higher frequency by our policyholders, as many of these policyholders have been subject to multiple rounds of increases. We expect a meaningful level of reserve releases from long-term care benefit reductions associated with the premium rate increases to continue as we go into 2020.

Given the varying sizes of states and approval amounts implemented, as well as different reduced benefit choices that policyholders can select, the level of reserve releases from reduced benefit elections may vary from quarter to quarter in the future.

Regarding our active life margins, we reviewed the key assumptions and updated where appropriate. These updates included routine updates for lapses, mortality, expenses, and interest rates. 2019 margins include significant unfavorable updates for incidents particularly on our newer products, as well as for benefit utilization. These last two unfavorable items drove material updates to our in-force rate action plan, which is essential to our strategy of proactively managing and mitigating adverse emerging experience.

Our large Choice 2 block and newer policy series experience continues to develop with more credibility as more policyholders go on claims. Our instance assumption includes approximately 11,000 claims from Choice 2 and newer series, which is less than 5% of claims since inception for the overall long term care block. As we obtain more experience, we credibility weight this developing experience more over time in the overall assumption review process.

While our 2018 new block incidence assumptions on these newer products performed well in aggregate, we have seen lower incidence rates on younger policyholders under the age of 75, but 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 ages, it was important for us to reflect this emerging experience.

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

A number of smaller updates were also made in 2019, including a refresh of interest rate and expense assumptions. As a reminder, we discount our GAAP margins using our portfolio yield, which moves more slowly than changes in current levels of interest rates. Our updates to our in-force rate action plan now include an estimate of future note yet approved rate actions of approximately $7.5 billion, which has grown from last year but offsets the net unfavorable impact from other assumption updates.

We are considering similar updates as we’re in the process of finalizing our cash flow testing assumptions for our New York subsidiary, GLICNY. Note that unlike GAAP loss recognition testing that uses best estimate assumptions, in statutory cash flow testing the tests are done on a legal entity basis with provisions for adverse deviation. We are starting to see emerging experience regarding higher severity in our GLICNY policyholders versus nationwide experience, but this limited experience is not yet fully credible and more data and analysis is needed.

We have historically used nationwide experience for setting long-term care assumptions in cash flow testing for all of our legal entities, including GLICNY, which is consistent with industry practice given the lack of statistical credibility for other approaches. Genworth has been a leader in recognizing the many issues in the long-term care insurance industry and proactively taking appropriate actions. Our efforts updating our multi-year rate action plan align to this approach. Most of the additional rate action assumptions added to this year’s multi-year rate action plan are on newer product series, including products where we have not requested rate increases in the past.

Our nationwide cumulative average rate increase achieved for Choice 2 is approximately 70% with nothing received on the newest block and 200%-plus for some of our older legacy policy series, with some states approving 300%-plus on some of the legacy products. These newer product series also have a lower attained age and a longer runway for collecting addition premiums. This allows for smaller and more manageable premium increases for our policyholders but a higher net present value benefit for the approved premium increase.

Turning to life insurance, as I mentioned earlier, our results include a $139 million charge for universal life primarily related to an unlocking charge, mainly to reflect the lower interest rate environment as well as model corrections. Overall mortality in life for the quarter improved versus the prior quarter and prior year.

The term life business continues to be negatively impacted from shock classes that are higher than our original locked-in assumptions, especially with the large 20-year level premium term life insurance blocks written in 1999 and 2000 entering their post-level premium periods. Total term life insurance stack amortization, a non-cash 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 and 2000 block to remain elevated through 2020 and 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. These assumption updates for life insurance mostly focused on mortality, persistency, and interest rates. Most of these updates were in line with existing assumptions in aggregate, with the exception of interest rates and mortality in the term product. The $139 million after-tax charge in universal life in the current period is primarily driven by the interest rate environment, where the 10-year treasury decreased 77 basis points during the year and the forward curve flattened considerably. This charge is non-cash and primarily represents an increase in reserves and accelerated amortization of deferred acquisition costs.

Mortality assumption changes in the term product, which had no financial impact in the current period, focused on improvements to mortality during the post-level premium period based on observed trends and emerging experience. These refinements to our mortality assumptions increased the margin in the term product.

In our fixed annuity products, we did not record any charges related to loss recognition testing in the current quarter compared to $13 million recognized in the prior quarter and $17 million in the prior year. Additionally, reserves were reduced on our fixed indexed annuity product due to slightly higher interest rates versus the prior quarter and year, and our immediate annuities benefited by higher mortality or decreased longevity versus the prior quarter and year.

Our adjusted operating loss in corporate and other was $50 million for the quarter. This loss was higher versus last quarter and last year due primarily to less favorable tax timing adjustments. Results also reflected the higher expenses versus last quarter due to an overhead allocation true-up and lower expenses relative to the prior year.

Now turning to capital levels, our U.S. and Australian mortgage insurance businesses continue to maintain very strong capital positions. In USMI, we finished the quarter with a PMIERs sufficiency ratio of 138%, up from 129% last quarter. Drivers in the quarter include continued strong profitability, execution of an insurance-like notes, or ILN transaction on the January to September 2019 new insurance written book, and the sale of USMI’s ownership of MI Canada for cash, which eliminated the PMIERs discount on affiliate stock. These drivers were partially offset by a $250 million dividend paid during the quarter. The PMIERs sufficiency level is in excess of $1 billion above the level of required assets as of December 31, 2019.

You will notice that the book value that we publish in our GAAP quarterly financial supplement for USMI has increased. A large part of this increase is from the Canadian shares being converted to cash. This occurred because USMI’s ownership of Genworth Canada was previously eliminated in consolidation in Genworth Financial’s financial statements as filed with the Securities and Exchange Commission.

When I announced USMI’s October dividend on last quarter’s call, I mentioned that we expect USMI to be able to pay an annual dividend going forward based on its strong capital levels and our current plans. These plans assume favorable trends and performance continue within the business. They also assume macroeconomic factors such as the U.S. housing market and employment levels continue to be strong but moderate from 2019’s robust growth. Future dividend amounts and timing will be based upon a variety of factors, including economic factors, regulatory constraints, ratings considerations, business performance, and the transaction with Oceanwide.

Our Australia MI business ended the quarter with an estimated capital ratio of 191%, down from 198% last quarter, which is in excess of AUD $400 million above the high end of the prescribed capital amount, or PCA management target range of 132% to 144%. The decrease in Australia’s capital ratio primarily reflected the special dividend of AUD $100 million 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 AG38, as well as the matters under consideration for GLICNY that I referred to earlier. We are currently working through these processes and will disclose results when finalized closer to our 10-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 action level RBC to increase compared to the 199% as of the end of the third quarter.

U.S. life statutory income in the quarter benefited from earnings in long-term care from in-force rate actions as well as income in variable and fixed annuities. Additionally during the quarter, U.S. life executed a reinsurance transaction by consolidating and restructuring three existing captive entities that were used to finance excess statutory reserves for universal and term life insurance. This transaction increased Genworth Life and Annuity Insurance Company’s capital by approximately $175 million, reducing annual financing and administrative costs by approximately $5 million to $10 million and benefited the overall GLIC consolidated RBC ratio by approximately 10 to 15 points.

I want to remind investors once again that as part of the initial agreement with Delaware regarding the Oceanwide transaction, Genworth will contribute $175 million to GLIC. This contribution to GLIC is a special commitment made as part of the Delaware approval process and in conjunction with the proposed transaction with Oceanwide. This is possible due to the $1.5 billion capital contribution committed as a part of that transaction. Absent any contributions made to U.S. life subsidiaries in connection with the closing of the Oceanwide transaction, it is our intention to manage all of our U.S. life entities, including GLICNY, on a standalone basis with no plans to infuse any additional capital. The U.S. life businesses will rely on their consolidated statutory capital, prudent management of in-force blocks, and actuarially justified rate actions to satisfy policyholder obligations.

Moving to the holding company, with the Genworth Canada sale to Brookfield complete, we ended the quarter with approximately $1.5 billion in cash and liquid assets, up from $366 million from the prior quarter. During the quarter and depicted on Page 17 of the investor deck, net proceeds to the holding company from the MI Canada sale were $1.2 billion with approximately $800 million remaining after paying off the term loan. During the quarter, the holding company also benefited from $334 million in dividends, which included $250 million from USMI, $34 million from Australia’s special dividend, as well as Canada’s ordinary and special pre-close dividends of $50 million.

Intercompany tax payments, which were elevated this quarter due to timing of certain items, were a source of cash to the holding company. Other miscellaneous items, primarily driven by lower cash collateral from an uptick in interest rates, increased during the quarter, benefiting cash by approximately $12 million. Finally, offsetting these inflows during the quarter were interest payments of $44 million.

As noted in my earlier remarks, following quarter close we paid AXA $134 million plus attorney fees and we fully redeemed the $397 million of outstanding debt due in 2020, plus accrued and unpaid interest and make-whole fees.

As we manage our liquidity in 2020 and beyond, we are planning for the repayment of our intercompany note of $200 million to Genworth Life Insurance Company that is due in March of 2020, possible incremental litigation expenses with AXA damages hearing taking place in June, and approximately $1.1 billion in combined debt maturities in February and September of 2021.

Before I conclude, we continue to receive inbound investor questions regarding the underlying components of Genworth’s value we discussed on our second quarter 2019 call. As our fourth quarter results demonstrate, our U.S. mortgage insurance subsidiary continues to be a strong business given the sustainability in favorable economic trends, its underlying new business growth, favorable loss performance, and capital initiatives. Genworth Australia has improved in value comparing the June 30, 2019 stock price to its closing trading price yesterday of $3.91 per share in Australian dollars. For U.S. life, we believe it is appropriate for investors to continue to value this business at zero given our isolation actions.

As Tom said, we continue to believe that the Oceanwide transaction is the best and most certain outcome for our shareholders, but wanted to provide an update on these perspectives given the inquiries we have received.

In closing, it was a strong quarter for Genworth’s mortgage insurance businesses as they continued to execute on their priorities and are performing very well financially with solid earnings, robust capital levels, and significant dividends to the holding company. We remain focused on the operational progress, including our long-term care rate action plan and other strategic actions intended to improve and help stabilize our U.S. life insurance businesses.

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

[Operator]

[Operator instructions]

Our first question comes from Ryan Krueger with KBW. Please go ahead.

[Ryan Krueger, KBW]

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

[Tom McInerney, President, Chief Executive Officer]

Ryan, that’s a very good question. It’s very hard to answer because we’re in active discussions with New York. What I would say is China Oceanwide and Genworth are willing to make a capital contribution. The size is to be determined and to be discussed with New York.

The one thing I would remind people is GLIC - Genworth Life Insurance Company is--you know, the LTC policies, a little over a million policies, 1,040,000 I think for all 49 states, and so the 49 states have an interest in GLIC and GLIC’s capital position. As part of the transaction, we did agree, as you all know, to put $175 million into GLIC. China Oceanwide and we agreed to that.

In the case of New York, in their original approval they didn’t ask for capital. They are now, and part of that is clearly the fourth quarter review and discussions we’re having. One thing that I tried to say in my remarks is GLICNY is much smaller than GLIC - 76,000 policies all in New York, so it’s one state, and I think part of the challenge for Genworth and Oceanwide on one side and New York on the other side is it’s just not the two parties, because there are 49 other states and 49 other regulators who also have an opinion, so one of the things that we have to keep in mind is the views of Delaware and Virginia - there our two other lead states, and then North Carolina, which is USMI, but they all have LTC policies, North Carolina Virginia and Delaware in GLIC, so the size of any capital contribution, obviously it’s important to New York, they’ll want more than less, but we do have to make sure it’s reasonable given what we agreed to for the 49 state company.

[Ryan Krueger, KBW]

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

[Tom McInerney, President, Chief Executive Officer]

What we’re talking about would be a capital contribution from Genworth Financial, the parent.

[Ryan Krueger, KBW]

Okay. My last question, related to the New York, so if you do get the approval from them before March 31, would you be willing to extend the agreement beyond March 31 if you haven’t received all the other approvals at that point, or is that comment just specific to New York?

[Tom McInerney, President, Chief Executive Officer]

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 owe a few pieces of financial information, some of it is relative to results for China Oceanwide and their recent quarters and things, but I think if New York--if we could agree with a capital amount with New York that was acceptable to China Oceanwide, acceptable to the other regulators, then I think we’re ready--Genworth is ready to close. I think Oceanwide is also ready to close.

As we’ve said before, the one remaining significant issue in China is they would have to talk to the State Administration of Foreign Exchange, or SAFE, in terms of the $2.7 billion they’re paying to purchase Genworth, where is that coming from, and China Oceanwide does have significant excess cash in China, and if they were able to use that, that would cover the purchase price. However, and this has been part of the filings for more than a year, to the extent that SAFE put a limit on how much capital could come out from China, they do have a contingency plan to fund the balance of the transaction from outside of China.

So that would be if we agreed with New York, acceptable to China Oceanwide, acceptable to other regulators, we’re both ready to close and then China Oceanwide, obviously is in the lead in discussions with SAFE about where the funding comes from, and therefore we certainly--our goal is to close by the end of the first quarter. We recognize that it’s been three and a half years and we can’t keep extending forever.

[Ryan Krueger, KBW]

Got it, thank you.

[Operator]

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

[Joshua Esterov, CreditSights]

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

[Tom McInerney, President, Chief Executive Officer]

I didn’t quite catch the last of it. Would you repeat your question, Josh? It’s a good question, just in case--

[Joshua Esterov, CreditSights]

Yes, with regard to--sure, sorry about that. With regards to China Oceanwide requesting approval from SAFE for the currency conversion and purchase, is that a process that can only start once the U.S. regulatory process has concluded?

[Tom McInerney, President, Chief Executive Officer]

First of all, there have been other China regulatory approvals, including with the NBRC, so that was passed on. I think the remaining issue is with SAFE. Chairman Lu, who is the owner of Oceanwide, and the Oceanwide management team have been talking to all the regulators and others in China. I have said in the past that I think because of the aging problem in China, if you read a lot of public commentary from the government and others in China, there is a significant elderly, aging problem, so I do think generally China and the regulators are supportive of the deal. I’ve talked to CBIRC, which is the regulator, four or five times and they’ve always been supportive because of the Genworth expertise.

SAFE has been in touch with Oceanwide along the way. I think they know it’s hard for SAFE to make a final determination of what they’re going to approve until they know what the final deal is. I will say that none of the China regulators have asked for any concessions, any accommodations on our deal over the last three and a half years. The only concessions and accommodations were from Genworth regulators, so first we had CFIUS and that took 18 months, and then we had the Delaware process and they wanted the $175 million, and that was approved, and then OSFI wouldn’t really give us an answer and so we felt the only way around that was to sell Genworth Canada. We think we got a very attractive price for it, so did China Oceanwide, so that meant that we didn’t need the Canadian regulatory approval.

I did say in my remarks one of the things that I want to give a lot of credit to is China Oceanwide and Chairman Lu, because we both would have preferred to keep Genworth Canada - it’s a good company, but we were committed to do the deal, and he did know that if we couldn’t get all the regulatory approvals, we wouldn’t get the $1.5 billion from China Oceanwide, and we had the $397 million of debt due in June of 2020. We do have the GLIC note that I think Kelly talked about, which is $200 million. We made the $135 million payment to AXA and we did pay off $800 million in debt to get that to $2.8 billion, 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 with. It’s been more challenging in the U.S.

I’m not blaming any of the regulators. They all have their own issues. Obviously there’s the geopolitical issues at the federal level, and then the states because, let’s face it, LTC is a challenge. We’ve gotten $12.5 billion net present value of premium - that’s not easy for those 50 states to give those large premium increases. On Page 12, you can see the history, and I talked about we’ve gotten more than 200%, some regulators have given us more than 300%. So again, I do think in fairness to Delaware and New York, they do see part of this as--they know we’re not--if there’s no deal, we’re not putting capital in, and if there is a deal and we close, we’re not putting capital in the future, so there is an opportunity for the regulators to at least ask for capital, and we’ve been--as I said, China Oceanwide, give them a lot of credit, they’ve been open and flexible to accommodate various U.S.-based regulators, and also Canada.

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

[Joshua Esterov, CreditSights]

Really appreciate all those thoughts on the regulatory front. Thank you very much.

[Operator]

Thank you. We’ll next go to Bill [indiscernible] with Bytespeed Partners.

[Bill, Bytespeed Partners]

Hey Tom. I’m going to try this again. If I do my numbers right, you’re paying basically $175 per policy, which means that New York is owed roughly $13 million-odd, call it $15 million. Is that what you’re offering and they’re asking for dramatically more? That’s my first question.

My second question is are you talking to the staff or is this actually coming directly from the director of DFS? Thanks.

[Tom McInerney, President, Chief Executive Officer]

Good questions, two-part question. I’ll take the first part. There are different metrics you can use to compare the size of New York to the Delaware company. One is lives, so it’s 76,000 to 1,040,000. The other is relative capital, and since we haven’t finished the statutory process yet, I’ll go with 9/30 numbers. At 9/30, the capital in New York was around $300 million and the capital in GLIC was $2 billion, so if you do that basis, $300 million to $2 billion, I think it’s 15%. Then if you look at premiums, generally the premiums are higher per policy in New York than the other states because New York is more expensive. For example, I think the average cost for a year in a nursing home in New York is $125,000, the national average is $100,000. So generally, I think the agents and financial advisors who sold those 76,000 policies generally had the policyholders in New York buy higher daily benefit amounts, so therefore the daily benefit amount per policy is higher in New York so the premiums on average in New York are higher.

If you do premiums on the 76,000 policyholders - I’m using 2018 data, it rounds $240 million were the annual premiums in ’18, and the annual premiums in GLIC were about $2.4 billion, so roughly 10%. Those are different metrics, we’ve talked about different metrics, different bases with New York, and I’m not going to go into where we are with New York but I would say I think it does matter ultimately, and I would just expect--and we are talking to Delaware, we’re talking to Virginia, and I talk to all 50 states all the time because I’m generally involved in all the premium increase discussions, so I have a good sense where all the regulators are.

I think--I will tell you I think all the regulators that are important to GLIC want this deal to happen because they see the benefits to their policyholders in this deal, there’s no question about that. I think they understand that New York, and we are discussing and Kelly talked about the nationwide experience, the New York-only experience, how you view that. What I will say is we have--the total claims all time in New York are 13,000, the total claims all time for Genworth are 280,000, so when you look at 13,000 claims and 280,000 claims and you project those in the next 30 years, clearly the claim experience on 280,000 is more credible, more actuarially significant. But the question is on the 13,000, is that--and Kelly talked about this, is that--we are experiencing higher claims than in nationwide, but with only 13,000 claims we really don’t know if that’s fully credible. I don’t think the New York regulator really knows that either. If it is fully credible, at some point we’re going to have premium increases to cover that, but it could also be that as the 13,000 claims grow that it reverts to the mean and the New York experience ends up looking more like the experience of the 280,000.

That’s notable, and it makes a little bit complicated in these discussions in terms of what you think about the New York-only experience and the nationwide, and different people, different actuaries - we have our actuaries, they have theirs - can have different opinions on that. It’s a complex issue but ultimately I think what we’re trying to do is--and China Oceanwide and Genworth really want this deal to close. I think all the other states want it to close. I think New York wants it to close, but it comes down to what is a fair capital commitment to New York, and we’re flexible on that. I think China Oceanwide and Genworth have shown flexibility. It’s taken us a long time to get through all those things, but we’ve shown flexibility.

But in the end, it’s got to be an amount that New York thinks is appropriate but that the other 49 regulators think is appropriate, and that is somewhat of a complex process, as you can imagine.

[Bill, Bytespeed Partners]

Understood, thank you. This is very helpful. So this is still actuaries to actuaries? This is still where you are in the process, rather than at the top, at the approval level?

[Tom McInerney, President, Chief Executive Officer]

I would say it goes from the top through the actuaries for Genworth and it goes from the top through all the staff at New York.

[Bill, Bytespeed Partners]

Thank you.

[Operator]

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

[Drew Figdor, TIG Advisors]

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

[Kelly Groh]

Drew, this is Kelly Groh. Thanks for the question. What I would say about New York is we really just have very emerging experience. I think Tom mentioned about 13,000 cumulative claims. If you think about 13,000 cumulative claims, our view is, like I mentioned in my prepared remarks, those aren’t credible just given the fact you’ve got to look at different underwriting classes, different genders, different age groups of the folks and different policy series, because there were underwriting changes that occurred. But we have seen, as I mentioned, different experience and particularly higher severity from some of those claims in New York. We don’t quite view those as credible yet, but it is emerging, and that’s the discussion we’re having.

Now, we’re also under a triannual exam right now, so they’re taking a much deeper look at it, and we are working with their group as a part of that exam and discussing that experience. But it is under discussion and we’re working through the cash flow testing assumptions right now.

Did that answer your question?

[Drew Figdor, TIG Advisors]

Yes, thank you.

[Kelly Groh]

Thank you, Drew.

[Operator]

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

[Himanshu Shah, Shah Capital]

Morning Tom. I have a question on your Plan B. Do you think Genworth can get $2 billion or more IPOing 40% to 50% of USMI in early Q2, if you cannot close this deal by the end of March?

[Tom McInerney, President, Chief Executive Officer]

Himanshu, 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 I think all of the possible alternatives with USMI. The only thing I would say is there are 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 USMI. I think we disclosed today the book value for USMI, I think it’s around $3.8 billion. There are comparable companies out there that are publicly traded. That doesn’t mean that we would trade the way they trade, but I think they’re reasonable comparables, so I think for you, Himanshu, or other investors, I think you have to look at our book value, look at the earnings, the 2019 earnings were strong in USMI, $568 million.

So there’s $568 million, look at the comparable PE multiples. The book value is 3.8, look at the comparable book value, and then you can come up with a view as to what you think the values are. But I would say that--and I’m sure you know this and others know, that when you go beyond a certain amount in the IPO, you could create tax issues and also--and again, not getting in all the rules, etc., depending on how much you do, you can prevent a future down the road opportunity to do a tax-free spinoff to Genworth shareholders.

I don’t want to go into all the different alternatives. I will tell you, as I said in my script, we’ve extended this deal 13 times. Every time we extended the deal, we valued what we thought China Oceanwide was worth - it’s pretty easy, $5.43 per share. We think it’s the highest and it’s certainly the most certain, because it’s a specific price. Any of the other options, including the one you talked about, that’s all part of reviews that we’ve done for the last three years, and 13 times we formally had board meetings where we evaluated the China Oceanwide deal versus the other alternatives, and we always concluded it was the best and most certain.

If we’re unable to close the deal with China Oceanwide, we’ll look at the alternatives, including the alternative, Himanshu, you just talked about. It’s certainly a reasonable alternative. I think it’s feasible, what you said. Whether it’s the best alternative, I don’t know.

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

At the end of the day, it’s our job to try to make the determination what’s the best alternative. Right now, we think the best and most certain is Oceanwide. If we can’t complete it, we’ll look at the next best and most certain alternative.

[Himanshu Shah, Shah Capital]

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

[Tom McInerney, President, Chief Executive Officer]

You know, I think there’s two ways to look at it, Himanshu. One is what you just said, and we’ll do that. The other is that I do think that most in the market seem to agree that the best option is the China Oceanwide option, which is $5.43, because the stock has traded at a discount. I think every time the stock has changed and when it’s gone down, who knows why. We had a great fourth quarter, we had a great 2019, so I don’t think it’s because of our operating results. We’re making great progress on the LTC premium increases, so I don’t think it’s that. But I do think investors recalibrate the probability of the China Oceanwide deal closing and they know what that’s worth, $5.43. They all have--the market has a view of what the next best alternatives are, and so I think when the stock is down, because we raise--you know, want to be transparent that we’re in negotiations with New York, I think that means shareholders put a lower probability on the Oceanwide deal closing, and I think the market is telling--what I think it’s telling the Genworth board and management is we prefer the Oceanwide deal, we agree with you it’s the best and most certain deal. We continue to get over 90% support for all the directors on the board, including as of last December, and so when the stock falls, we’re watching it as you are, I think it’s falling because investors are re-assessing the probability of Oceanwide closing and it’s falling because the $5.43, perhaps they put a low probability on that.

But I don’t know. That’s the market. 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 can get it done. If we can’t, we’ll do what you said - we’ll move quickly to the best Plan B. We’ll talk to shareholders like yourself and get input, and I believe we’ll ultimately hold an investor day so we can talk--if we have to get to a Plan B, to talk about that and say whatever the Plan is, why we think it’s the best. But you know, shareholders have different views, and if based on those views we think another alternative is better, because in the end it’s about what’s the best long term shareholder value to shareholders, and if there’s another idea that emerges that’s better, we’d obviously consider it.

[Tom McInerney, President, Chief Executive Officer]

With that, Himanshu, I appreciate that. I do want to say to all the investors, we ran a little bit over - 10 minutes, there’s obviously a lot of questions on the deal, so we wanted to take some of them. But Kelly and I are happy to continue the discussions with any shareholders who want to give us their views or talk to us. Please contact Tim Owens in IR.

Let me just sum up and then I’ll turn it back to Derek to end the call. All of us at Genworth want to thank you for your questions and your continued investment and interest in Genworth. As I’ve said, we’re working hard to close the China Oceanwide transaction. We continue to believe it’s the best and most certain outcome for our shareholders and all of the other stakeholders. But having said that, I also want to be clear today that if we can’t complete the transaction, we are prepared to move forward with evaluating other alternatives, and the board and I and the management team take very seriously our fiduciary duty to maximize the value to shareholders, no matter what ultimate outcome we pursue.

With that, Derek, I’ll turn the call back to you.

[Operator]

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