Genworth Financial Inc

NYSE:GNW

Earnings Call Transcript 2020-Q4

[Operator]

Good morning, ladies and gentlemen and welcome to Genworth Financial’s Fourth Quarter 2020 Earnings Conference Call. My name is Lauren and I will be your coordinator today. [Operator Instructions] 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 and thank you for joining Genworth’s fourth quarter 2020 earnings call. Our speakers are once again remote this morning, so please excuse any sound quality or technical issues that may arise. Our press release and financial supplement were released last night and this morning, our earnings presentation was posted to our website and will be referenced during our call. We encourage you to review all of these materials.

Today, you will hear from our President and Chief Executive Officer, Tom McInerney, followed by Dan Sheehan, our Chief Financial Officer and Chief Investment Officer.

Due to applicable security law restrictions, our comments regarding the status of preparations for an IPO of our U.S. mortgage business will be limited to our prepared remarks. Following our prepared comments, we will open up the call for a question-and-answer period. In addition to our speakers, Rohit Gupta, Chief Executive Officer, Genworth Mortgage Insurance, 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 the results of our Australia business please note that all percentage changes exclude the impact of foreign exchange. And finally, references to statutory results are estimates due to the timing of filing of the statutory statements.

And now I will turn the call over to our President and CEO, Tom McInerney.

[Tom McInerney, President and Chief Executive Officer]

Thanks, Tim. Good morning, everyone and thank you for joining our fourth quarter earnings call.

I want to start my prepared remarks today by acknowledging the announcement we made a few weeks ago about Kevin Schneider, Genworth’s Chief Operating Officer, who will be leaving Genworth after serving in an advisory role through May 31 of this year. Kevin has been an instrumental leader on our Executive Committee and within Genworth’s Global Mortgage Insurance businesses, over his 25-year career at Genworth and its predecessor companies. As CEO of the Global Mortgage Insurance Division, Kevin led a Global Mortgage Insurance presence across the U.S., Mexico, Australia, Canada, India and Europe. Kevin provided critical leadership to the disposition of MI Europe, the IPO of Genworth Australia and the sale of our ownership stake in Genworth Canada. As Chief Operating Officer for Genworth, Kevin also provided critical operating leadership to the U.S. Life team, all while helping lead the company through our transaction with Oceanwide. The Genworth Board of Directors and I are extremely grateful to Kevin for a strong and steady leadership and his outstanding contributions to Genworth over his career. Please join me in wishing Kevin well in his next adventure.

Now turning to the fourth quarter, Genworth delivered very strong results as we continue to execute well and make progress against our strategic priorities. I am pleased with our ongoing ability to achieve strong operating results in what remains an uncertain macroeconomic environment. Following our strategic update on January 5, we have focused our efforts on executing our revised strategic plan and taking steps to strengthen our businesses.

First, as we discussed in January, we remain focused on preparing for a potential partial IPO of U.S. MI, subject to market conditions as well as the satisfaction of various conditions and approvals. While we are not permitted to discuss details associated with this transaction due to applicable gun-jumping and related securities laws, I can tell you that we began our preparations for the IPO over a year ago as part of our contingency planning. Since we announced the indefinite delay of the Oceanwide transaction on January 4, and our intent to pursue a partial U.S. MI IPO, we have received multiple expressions of interest from third parties and various transactions involving our U.S. MI business, including a sale of 100% of U.S. MI. The Board and management will consider these various proposals, moving forward, as we continue to prepare for an IPO. Our priority in any transaction would be to maximize long-term shareholder value by unlocking value from U.S. MI and further insulating U.S. MI’s ratings. We believe that additional insulation, along with significant holding company deleveraging over time, would improve U.S. MI’s ratings, which are very important from a competitive standpoint.

Second, we ended the year in a very strong liquidity position with approximately $1.1 billion of cash, enabling us to pay off our February debt maturity of $338 million. And finally, we recently took actions to realign Genworth’s expense structure to our current business activities, given the changing footprint of our businesses. The expense reductions completed in January, which included impacts to people, processes and programs, are expected to reduce annualized expenses by $50 million. We know that this is a challenging time for our employees, and we do not take these actions lightly. As we execute our contingency plan, we have a responsibility to align the U.S. Life business structure to its current focus, which is serving our approximately 3 million existing policyholders by effectively managing the in-force blocks of business. Additionally, we need to ensure that our corporate structure reflects our go-forward business needs. With the sale of Genworth Canada and the potential options for U.S. MI, continued streamlining of corporate support functions will be necessary. We evaluate our cost structure on an ongoing basis as we move forward with our contingency strategy.

With respect to our U.S. Life Insurance businesses, I want to be clear that we continue to be committed to improving long-term care insurance model in the United States, which has experienced significant challenges due to the legacy business and regulatory issues when the products were designed decades ago. Genworth is the leader in long-term care insurance, with 40 years of experience and expertise that we can leverage to help create a much stronger, more viable industry standard model that meets the demands of an aging population.

Due to our experience in pioneering these products, developing solutions to reduce losses on the legacy policies and learning from past industry challenges, we believe Genworth can play a key role in strengthening the long-term care insurance market, an effort which is being spearheaded by the NAIC LTC insurance executive task force. In support of this effort, we continue to execute against our LTC multiyear rate action plan to secure approvals for long-term care insurance right actions and benefit reductions. Our progress on this initiative has significantly improved the financial stability of our legacy long-term care insurance business with more work still to be done.

As I shared on our January 5 call, we had a very successful fourth quarter for LTC rate action approvals with over $160 million in additional premium increases achieved. As of year-end 2020, we achieved approvals on more than $1 billion of annualized in-force premiums, representing a weighted average premium increase of 34% or $344 million on an annual incremental premiums going forward. On a cumulative net present value basis from 2012 through the end of 2020, we have achieved approximately $14.5 billion of approved LTC premium rate increases.

As we have discussed in the past, we have no plans to infuse additional capital into, or extract capital from, our U.S. Life Insurance businesses. Going forward, the U.S. Life Insurance businesses will continue to rely on their consolidated statutory capital of approximately $2.3 billion as of the end of the third quarter, significant claim and ALR reserves, prudent management of in-force blocks and actuarially justified rate actions to satisfy obligations to our policyholders.

Before I turn to our fourth quarter results, I want to provide a brief update on where things stand with Oceanwide. The merger agreement with Oceanwide remains in effect. Oceanwide has informed us it is continuing to work towards obtaining the financings to close the transaction. But based on our recent conversations, we do not believe the funding issues will be resolved in the near term, if at all. While Genworth remains open to completing the transaction, our primary focus has shifted to our contingency plan in the U.S. MI IPO. If there is no transaction, it is possible that Oceanwide and Genworth could, in the future, agree to pursue a long-term care insurance focused joint venture in China, given the excellent long-term growth opportunities for elder care in China and the strong relationship we have established with Oceanwide.

Genworth is in a much stronger financial position now than it was 4 years ago when we first announced the merger. We have taken several strategic actions to enhance holding company liquidity, reduce debt, further isolate U.S. MI from the U.S. Life companies and significantly reduce the capital risk associated with our legacy LTC insurance blocks. Genworth has also delivered solid operating performance over the last several years led by strong results in U.S. MI, which grew adjusted operating income at a 27% compound annual growth rate from 2014 to 2020, which is among the fastest growth rates in the mortgage insurance industry. In addition, we have significantly improved our balance sheet flexibility over the last few years by refinancing our debt and receiving two consents from bondholders that further isolated our life and long-term care insurance companies from U.S. MI. I am proud of these accomplishments, which have put Genworth on a more solid financial footing, as we proceed with our plans to maximize shareholder value over the long-term.

Now I’d like to briefly cover a few highlights of our fourth quarter financial and operating performance before turning the call over to Dan to provide more details. In the fourth quarter, Genworth reported net income of $267 million and adjusted operating income of $173 million. The adjusted operating income result was the highest quarterly result in the last 6 quarters. U.S. MI reported adjusted operating income of $95 million for the quarter and reported a record level of new insurance written for the full year. Australia MI reported an adjusted operating loss of $16 million for the quarter, impacted by higher losses from reserve strengthening compared to the prior quarter and prior year.

The U.S. Life companies reported quarterly adjusted operating income of $129 million. This was driven by LTC Insurance adjusted operating income of $129 million, net of reserve strengthening. The strong LTC results reflect the cumulative benefits of $14.5 billion of LTC premium increases since 2012, a $75 million year-over-year increase in net investment income and significantly higher LTC claim terminations and lower claim incidents because of the COVID-19 pandemic. We are prudently managing capital and reserves in light of the continued economic disruption and uncertainty caused by the pandemic. As a result, we increased reserves across Australia MI, U.S. MI and U.S. Life during the quarter.

I would like to thank all of our employees for their hard work and outstanding execution during 2020, which enabled us to deliver a very strong full year company-wide adjusted operating income of $317 million despite the substantial challenges imposed by COVID-19. I will now turn the call over to Dan to discuss the fourth quarter and full year results in more detail.

[Dan Sheehan]

Thanks, Tom and good morning everyone. Today, I’ll cover our financial results for the fourth quarter, capital positions of our subsidiaries and holding company liquidity. I’m pleased with the continued progress made in each of these areas during the quarter with improved earnings, progress on our multiyear rate action plan, strong capital ratios in our mortgage insurance businesses and incremental liquidity at the holding company.

We reported net income available to Genworth shareholders for the quarter of $267 million and adjusted operating income of $173 million. Included in net income for the quarter was $160 million in realized investment gains, primarily from the mark-to-market on certain securities and derivatives gains, partially offset by a $30 million loss from discontinued operations. The loss from discontinued operations primarily related to tax charges.

U.S. mortgage and housing market continued to perform well in this period of uncertainty with improving home prices, a very large origination market and continuation of slowing delinquencies from the earlier peak. We’re closely monitoring government initiatives, including the recently announced foreclosure moratorium extension and fiscal stimulus plans, along with forbearance options currently available, which we view as positives for delinquency and cure development and ultimate claims.

Overall, financial results for U.S. MI in the fourth quarter were driven by strong insurance in force growth and lower levels of new delinquencies, partially offset by reserve strengthening. For the quarter, U.S. MI reported adjusted operating income of $95 million at a loss ratio of 35%. Primary new insurance written in U.S. MI was $27 billion in the quarter, up 49% versus the prior year, primarily driven by higher refinancing activity and a larger private mortgage insurance market.

As most of our peers have not reported, we estimate our market share was generally flat versus the prior quarter. While we’re pleased with our NIW levels and primary insurance in force growth of 14% versus the prior year, the low interest rate environment and high refinance activity has driven low persistency levels in our insurance portfolio with varying impacts to our business. Low persistency has increased single premium cancellations which have remained elevated throughout 2020 and benefited premiums during the quarter by $32 million, which was unchanged from the prior quarter. While we could continue to see elevated levels of single premium cancellations, we do expect this trend to decline going forward with a lower mix of single premium product and eventual uptick in mortgage rates.

Lower persistency throughout 2020 has shifted the mix of our risk in force to be weighted more towards the most current book years, as illustrated on Page 5 of the investor presentation. The credit quality of these recent vintages remains strong. In addition, our 2005 through 2008 legacy books now comprise only 5% of our risk in force. While new primary delinquencies during the fourth quarter were still elevated versus pre-COVID levels, they were down 28% sequentially, with approximately 56% of new primary delinquencies being recorded in forbearance plans.

We ended the quarter with approximately 44,900 total primary delinquencies or a delinquency rate of 4.86%, both of which decreased sequentially, as cures outpaced new delinquencies in the quarter. In total, approximately 31,800 or 71% of our prior delinquencies are in forbearance. Our servicer reported forbearance trends continue to decline from peak levels in May 2020 and ended the fourth quarter with 5.4% or approximately 50,000 of our active primary policies reported in a forbearance plan, with 37% of those in forbearance still reported as current.

During the quarter, we revised our estimated claim rates for previously reported delinquencies. The $37 million pretax reserve increase in the quarter, primarily reflects our expectation that prior delinquencies and forbearance plans will have a higher claim rate than our initial best estimate, given the slower emergence of cures relative to our original expectations as well as the ongoing economic impact due to the pandemic. With this adjustment, our current blended claim rate estimate for all COVID delinquencies or delinquencies since April that remain outstanding at year-end is approximately 7%.

In Australia, the economy continues to recover as evidenced by positive trends in the unemployment rate and home prices. Last quarter, the Australian federal government and Australia’s large banks extended the home and business loan deferral program, which allowed eligible borrowers additional assistance beyond the original 6-month forbearance period. Approximately 2.4% of total Australia households are utilizing these programs, down from 7% last quarter.

For Australia MI, over 8,100 loans or approximately 1% of our insured loans are currently participating in these forbearance programs, down from approximately 31,000 loans reported at September 30, 2020. Under Australia regulatory guidelines, these loans are not reported as delinquent. The ultimate outcome of these loans remains uncertain, considering the current macroeconomic conditions, including the phase out of certain borrower support measures.

During the current quarter, our Australia business strengthened its U.S. GAAP loss reserves by $88 million pretax, the majority of which was a result of a refinement in methodology that recognizes losses earlier on average, primarily through the IBNR reserve. The methodology refinement was prompted by observed changes in incidence patterns or delinquencies and claims resulting in part from the COVID-19 borrower support measures previously mentioned. Including this reserve update, the adjusted operating loss for Australia for the fourth quarter was $16 million compared to adjusted operating income of $7 million in the prior quarter and $12 million in the prior year. The U.S. GAAP loss ratio for the quarter was 122%. Strong mortgage origination volumes supported by low interest rates drove $6.7 billion of flow NIW, which was up 18% sequentially and 29% versus the prior year. The business also completed its annual review of its premium earnings pattern in the fourth quarter, which resulted in no changes.

Turning to U.S. Life, the segment reported adjusted operating income of $129 million in the quarter compared to adjusted operating income of $14 million in the prior quarter and an adjusted operating loss of $115 million in the prior year. Our U.S. Life businesses benefited from variable investment income and continued to experience elevated mortality that we believe is attributable in part to the COVID-19 pandemic. In Long-Term Care, adjusted operating income was $129 million in the fourth quarter compared to $59 million in the prior quarter and $19 million in the prior year. Results continue to reflect the cumulative benefits of our 8-year track record of achieving significant LTC premium increases and benefit reductions.

Claim terminations were significantly higher in the fourth quarter versus the prior quarter and year. We do not require death certificates for LTC terminations, but assume the elevated terminations were driven by COVID-19. We believe that the recent increase in claim terminations during the pandemic is temporary and has primarily impacted our most vulnerable claimants. In the fourth quarter, we increased claim reserves by $91 million pretax, as noted on Page 13 of the investor materials, reflecting our view that the remaining claim population is less likely to terminate than the pre-pandemic average.

New claims submissions remain lower than expected, which continues to drive favorable IBNR development. However, we currently believe that the decrease in incidence is temporary, reflecting delays in policyholders going on claim due to COVID-19 concerns and restrictions and that our incidence experience will ultimately resemble previous trends. As a result, we further strengthened our IBNR reserve by $47 million pretax in the quarter after strengthening this reserve by $24 million pretax in the prior quarter. Net investment income for LTC was up $29 million after tax versus the prior quarter and $40 million versus the prior year from higher limited partnership and variable investment income.

Shifting to in-force rate actions for LTC, the overall benefits from in-force rate actions have remained strong throughout 2020. For the year, Genworth received approvals impacting approximately $1 billion of premiums with a weighted average approval rate of 34%. In addition, our premium rate filing increased activity for the year outpaced all prior years as measured by number of filings and impacted premiums. As a reminder, in 2020, we began filing for actuarially justified rate increases on new product series, for which we had not requested rate increases in the past. We remain engaged with state regulators in the importance of actuarially justified rate increases and are encouraged by the continued cooperation from most of our regulators. Page 15 in the investor materials illustrates the cumulative approvals by product series.

Turning to life insurance, overall mortality for the quarter was elevated versus the prior quarter and prior year. The fourth quarter included an estimate of approximately $16 million after tax in COVID-19-related claims based on death certificates received to date, bringing the full year amount to $39 million after tax. Term life insurance products continue to be negatively impacted by shock lapses that are higher than our original locked-in assumptions as the large 20-year level premium term life insurance business written in 2000 enters the post level premium period. Total term insurance DAC amortization, a non-cash impact, primarily related to these term life lapses, reduced earnings by $18 million after tax compared to $34 million in the prior quarter. As sales levels declined in the second half of 2000, we expect amortization related to term policies entering the post level period to continue to decrease into 2021.

In our term universal life insurance product, as part of our assumption updates, we refined our modeling assumptions for premium persistency as policies enter the post level period and do not expect to see the increased reserve dynamic we experienced in prior quarters. In fixed annuities, adjusted operating earnings of $20 million for the quarter was lower compared to the prior quarter and prior year, driven by lower mortality and lower net spreads in single premium immediate annuities. These products continue to decline since we suspended the sales in 2016 with a total AUM, excluding favorable market impacts of $0.2 billion, down 11% in 2020 to $11.8 billion.

In the runoff segment, our adjusted operating income was $13 million for the fourth quarter, down sequentially and versus the prior year. The fourth quarter assumption updates were partially offset by strong equity market and interest rate improvement during the quarter. Our variable annuity products continued to decline since we suspended sales in 2011 with total AUM excluding favorable market impacts of $0.5 billion, down 11% in 2020 to $5 billion.

For our U.S. life insurance companies, we completed our review of key actuarial assumptions in the fourth quarter for each of our product lines. In LTC, we updated all claim reserve assumptions. The impact of that update was not material to our claim reserves. We currently view the pandemic-driven trends observed in the latter half of 2020 as temporary and not indicative of future trends or loss performance.

Our active life margins in LTC remained flat versus the prior year at $500 million to $1 billion. We reviewed the key assumptions for lapse, morbidity, mortality, expenses and long-term interest rates, among other assumptions. For 2020, the GAAP active life margins included unfavorable updates for benefit utilization and claim termination rates, particularly for in-force policies in our New York-domiciled entity, GLICNY. For GLICNY’s policies, we have been monitoring emerging claims trends relative to nationwide experience with the benefit of additional data and actuarial analysis. For 2020, we were able to fully reflect New York-specific experience in GLICNY’s assumptions. We have observed that the severity of New York claim tends to be significantly higher than the nationwide average, driven by lower mortality. New York incidence also tends to be materially higher than the nationwide average. These items drove updates to our in-force rate action plan, which is essential to our strategy of proactively managing and mitigating adverse emerging experience.

We now project the need for $22.5 billion in LTC premium increases and benefit reductions on a net present value basis. As Tom mentioned, since 2012, we’ve achieved $14.5 billion of this amount, leaving a need of approximately $8 billion remaining. The remaining amount has grown from last year, but largely offsets the net unfavorable impacts from the assumption updates. Approximately half of the additional rate action assumptions added to this year’s multiyear rate action plan could reflect the adoption of New York-specific experience that I discussed previously. Also, a significant portion of the additional rate action assumptions include higher actuarially justified rate increase amounts on our newer product series, Choice II and later. These newer product series have a lower attained age and a longer runway for collecting additional premiums. This allows for smaller, more manageable premium increases for our policyholders, but a higher net present value benefit for the approved premium increase.

We also completed our actuarial assumption updates for our life insurance products during the fourth quarter with a net benefit of $10 million after tax. Model refinements in term universal life, that I previously mentioned, and updates for mortality, persistency and interest rates in our universal and term universal life products resulted in a net benefit of $60 million after tax. This was partially offset by a $50 million after-tax charge related to universal life DAC recoverability testing, primarily related to these updates.

As we noted last quarter, certain of our universal life insurance products with secondary guarantees, require a separate testing on a statutory basis called AG 38, 8D, which uses a prescribed reinvestment rate from July to June each year. The decline in rates during this period drove the need to increase statutory reserves by approximately $230 million in 2020, which we believe will negatively impact our risk-based capitals for Genworth Life Insurance Company, or GLIC, by approximately 20 points. Rounding out the results, corporate and others adjusted operating loss is $48 million for the fourth quarter and was in line from the prior quarter and prior year.

Turning to capital levels, our U.S. and Australian mortgage insurance businesses maintained strong capital positions at the end of the fourth quarter. In U.S. MI, we finished the quarter with a PMIERs sufficiency ratio of 137% or approximately $1.2 billion above published requirements as of year end 2020. The improvement in our PMIERs efficiency versus the prior quarter was driven by an insurance-linked note transaction executed in October, which provided $311 million of PMIERs credit at year-end 2020 and elevated lapse from prevailing low interest rates. These impacts were partially offset by strong new business levels and elevated lapses, which accelerate the amortization of our existing reinsurance transactions.

In January, we received regulatory approval for XOL reinsurance on our 2021 book of NIW, which will provide up to $210 million of PMIERs credit on a portion of current and expected new insurance written for the 2021 book. Our Australia MI business ended the quarter with an estimated prescribed capital amount or PCA ratio of 165%, which is approximately AUD200 million above the high end of the management target range of 132% to 144%.

During the quarter, the Australia business successfully renewed its AUD800 million reinsurance program, which was effective January 1, 2021. Absent any impact from cash flow testing, we would expect capital at Genworth Life Insurance Company, or GLIC, as a percentage of company action level RBC at year-end to be above the prior year, including the AG 38, 8D impact, that I just mentioned. U.S. Life statutory income in the quarter benefited from earnings in LTC from the temporary shift in termination and incidence trends and from in-force rate actions.

For holding company cash, we ended the quarter in a very strong cash position with $1.1 billion of cash and liquid assets or approximately $740 million above our targeted cash buffer. I would note this excludes approximately $300 million in cash held at U.S. MI’s intermediate holding company, Genworth Mortgage Holdings, Inc., that under current GSE restrictions must be used for interest expenses for the August 20 debt issuance or as capital contributions to the operating company. Approximately $340 million of the Genworth holding company cash balance was used to pay the principal of our February 2021 senior note maturity.

Page 20 of the investor presentation provides quarterly activity, including intercompany tax payments of $190 million. These intercompany tax payments reflect strong underlying taxable income from our U.S. insurance subsidiaries in the third and fourth quarter of 2020. We expect these payments to continue through 2021, although at a lower amount. As we look forward, to fully address the September ‘21 maturity and maintain our forward debt service buffer, we continue to prepare for a potential IPO of our U.S. MI business, subject to market conditions, as Tom mentioned.

In closing, we’ve taken numerous steps to improve the liquidity and financial flexibility of our holding company as well as position our businesses to navigate these uncertain times. We’re pleased with our financial progress and remain focused on providing value to all key stakeholders.

With that, we’ll now open the line for questions. As Tim noted earlier, due to applicable securities law restrictions, our comments regarding the status of preparations or other matters related to a potential IPO of our U.S. mortgage business will be limited to our prepared remarks.

[Operator]

[Operator Instructions] We’ll take our first question from Ryan Krueger with KBW.

[Ryan Krueger, KBW]

Hi, good morning. As you weigh a potential partial IPO of U.S. MI versus a full sale of the company, can you discuss what some of the key considerations would be in terms of making that decision?

[Tom McInerney, President and Chief Executive Officer]

Well, Ryan, I think the baseline is whichever provides the best long-term shareholder value. And that’s based obviously on the price on a full sale versus what we think the execution is on the IPO. One of the – the core plan is the – a partial IPO that preserves the ability for a tax-free spin-off of U.S. MI shares to general shareholders in the future. So that’s an important criteria that we are considering the partial IPO versus the full sale.

[Ryan Krueger, KBW]

Got it. And then, I guess, can you help us think about any – I guess, if you did do a full sale, how to think about the tax consequences that might emerge from that, as you separate MI from the rest of the company?

[Tom McInerney, President and Chief Executive Officer]

Ryan, I think the main thing is you lose some tax consolidation. There wouldn’t be, I think, a taxable gain. But Dan, do you want to cover the implications of Ryan’s question?

[Dan Sheehan]

Sure. In the case of the full sale, there wouldn’t be meaningful tax considerations for us. We’ve got a fairly high basis in U.S. MI. The real issue is going to be making sure that going forward, we’re comfortable with what to do with the proceeds of the sale and the tax position that we would be in sort of post-sale, but the tax – a full sale of U.S. MI is relatively straightforward from tax perspective.

[Ryan Krueger, KBW]

Alright. And then just last one, I guess what level of confidence do you have that if you do sell U.S. MI, that 100% of the proceeds will be available to the holding company versus regulators through the Form A process requiring some amount to be contributed to GLIC?

[Tom McInerney, President and Chief Executive Officer]

So Ryan, I mean, this has come up a lot, and it’s a difficult question to answer. There is no law, statutory law authority that gives regulators – so our principal regulators are Delaware for GLIC, New York, obviously, for the New York subsidiary, and Virginia for GLAIC, there is no legal authority that gives regulators the legal right to require Genworth or any holding company to contribute capital or the proceeds, in this case, Ryan, to your question from the U.S. MI sale. However, I am sure there would be challenges from the states, potential litigation. So, one of the things that Dan and I and the Board have to think about is the ability to ultimately convert whatever proceeds. And the proceeds could be cash the proceeds could be cash and shares. There is again many different alternatives. But clearly, when the cash would be available to shareholders, is a key criteria and our financial and outside legal advisers are really focused on that.

[Ryan Krueger, KBW]

Thank you.

[Operator]

We will take our next question from Joshua Esterov with CreditSights.

[Joshua Esterov, CreditSights]

Hey, good morning folks. I appreciate you taking the questions. I think at this point, you’ve set yourself up pretty well with a clear runway towards addressing the 2021 debt obligations, assuming a successful IPO of U.S. Mortgage Insurance. But I’m curious to hear about your strategy for dealing with some of the obligations, let’s say, over 2022 through 2024 with that time frame. You’ve got the AXA litigation settlement payment, a couple of debt maturities to plan for. And I don’t think existing liquidity plus a partial IPO would be sufficient. So any thoughts on how you plan to approach that would be helpful?

[Tom McInerney, President and Chief Executive Officer]

Well, certainly, I think we are in good shape on the 2021. In terms of the AXA amounts, they are not due until 2022 and there are significant other sources of cash. We do have potential cash flow next year from GMA and from U.S. MI in terms of dividends or other options with either of those. So I think we’re feeling reasonably good about our ability to handle all of the obligations through the end of ‘24. And then the remaining debt was about $900 million, $300 million is due in 2034 and then the balance, about $600 million due in 2066. So we feel we are in pretty good shape. Dan, I wanted to provide just a little bit of color on some of the things we are looking at.

[Dan Sheehan]

Yes. Thank you, Tom. So for 2021, we ended the year with $1.1 billion of cash, which is sufficient to pay off both the February, which was paid off this week as well as the September. And the IPO is going to help us rebuild the buffer, but also give us the proceeds to pay off the AXA liabilities in 2022. And what I would say is between dividend cash flows from U.S. MI, and we always have Australia, which we set as a financial asset for some time. And with liquid asset in U.S. MI with public shares, to the extent that we needed to, we could use any potential sell down to take care of liabilities in ‘23, ‘24. My guess – and assuming COVID lessens in the second half of the year and we return to more of a normal economy, the cash flows of U.S. MI, which has been a very strong business for a number of years, would allow us to payoff the ‘23’s and ‘24’s between dividends and cash on hand.

[Joshua Esterov, CreditSights]

I appreciate that color. Thanks a lot. If I could squeeze in a second one here and I recognize your ability to speak to U.S. MI is limited right now. But in your prepared remarks, you had mentioned that the ratings for U.S. MI were very important from a competitive standpoint. I was curious if you could elaborate on that just a bit. It seems like to date, the ratings disadvantage hasn’t been a major factor in Genworth’s ability to win business. Is that more about concern about like risk transfer pricing or that it could translate to less competitive pricing from Genworth? Any thoughts on that, where your heads are at, would be helpful.

[Tom McInerney, President and Chief Executive Officer]

Josh, that’s a good question. I would say – and I’ll ask Rohit Gupta, and Rohit is President and CEO of U.S. MI. He’s been in that role as long as I’ve been here for 8 years. He’s done an outstanding job running U.S. MI. And so he is now going to be a speaker going forward. So I’ll let him give you a little bit of a sense on this, the competitive landscape, U.S. MI versus competitors. But we think we have been very successful, Rohit and team, very successful in maintaining reasonable market share. When you have 6 MI competitors, you’d say the average market share should be around 16%. And I think we’ve been able to be in that range. However, there is no question that our ratings are lower than the other MIs. And while it hasn’t impacted us so far, we think over the long run, our goal is to get our ratings in line with our competitors because we feel then we’d be able to compete on a better basis. But Rohit, you are in the market every day, dealing with this. So if you want to give some comments to Joshua, I think we appreciate it.

[Rohit Gupta]

Sure, Tom. Thank you. Good morning, Joshua. So I would just add to a few things to Tom’s comments, and I completely agree with Tom’s statement that we have been able to navigate very successfully in the market, given our ratings disadvantage over the last few years. I think from a flow mortgage insurance market perspective, there are some customers, there are some segments of the market, primarily depository institutions, so think about large banks, think about small banks, that do care about ratings even with our very strong PMIERs levels. And an improvement in our ratings would actually help us compete better in those segments. And those are the segments where, historically, we have not been very successful. So that would be an upside to our flow mortgage insurance market. And to your comment, in the credit risk transfer market, ratings is an important consideration for participation in those reinsurance transactions. So while we have navigated in that market a little bit, we have not been a big participant in the GSE CRT transaction as well as portfolio loans for banks. So that would be an upside to the business. And lastly, a strategic consideration for us always is, making sure that our ratings also position us as a strong counterparty to the GSE. So making sure that our ratings are competitive, and we are seeing not only from a PMIERs perspective, but also from a ratings perspective as kind of strong counterparty and competitive counterparty in the market are the reasons to shoot for higher ratings.

[Joshua Esterov, CreditSights]

Understood. Thank you everyone for your time.

[Operator]

[Operator Instructions] We’ll take our next question from Ryan Gilbert with BTIG.

[Ryan Gilbert, BTIG]

Thanks, good morning. First question, Tom, just for you, regarding the potential Oceanwide transaction, is there anything you’ve learned since the January 5 call that – I guess, just anything incremental on Oceanwide’s ability to source funding to complete the transaction? Because I think the market is reacting to your commentary around Oceanwide maybe not being able to source the funding at all. So just any incremental information you’ve learned since January that might have changed your view around the transaction?

[Tom McInerney, President and Chief Executive Officer]

Well, look, the Oceanwide merger agreement is still in effect. I said in my comments, I believe Oceanwide continues to work on the financing, particularly the financing outside of China with Hony Capital. I think there are ongoing challenges in the geopolitical landscape that are out of Oceanwide and Genworth’s control in terms of the relationship between China and the U.S. I think they still want to do the transaction. We still think that transaction, as we’ve said for some time, we think is the best option for shareholders if it could be achieved. But just given where we are, and time has passed since the end of the year, I have regular conversations all the time with Oceanwide. So we are still working with them to help in any way we can on the financing. But I think we are where we are. And based on the conversations that I’ve had with the Chairman and with his senior team, it does appear that it would be difficult for them to raise the financing in the near-term, if at all. But we’re still open to that. And I think they still are very focused on trying to get the financing in place. So those are the comments I’d make, Ryan.

[Ryan Gilbert, BTIG]

Okay, thank you for that. And anything you can comment on just regarding the potential long-term care joint venture with Oceanwide in China, and maybe how you would capitalize your portion of that potential joint venture?

[Tom McInerney, President and Chief Executive Officer]

That’s a great question. And I would say, and I think we’ve been consistent over the 4 years, that a key driver for why Oceanwide was and is willing to pay 543 is because of the huge potential in China. There are 250 million Chinese today, 60 and older. That will double to 500 million by 2050. I think the government is encouraging outside parties, including Genworth, to come in and innovate in the market. There really isn’t a strong, well-developed competitive long-term care insurance market in China or a health insurance market in China. And so we have been working with Oceanwide beyond the transaction on the strategy in China. And we have outside firms, consulting firms and others advising on that. So I think the opportunities in China LTC are very substantial. There isn’t a lot of – no one in China that I know of has 40 years of experience in the market. So I do think that in a joint venture, we would bring less capital. We’d bring some perhaps, but less capital and – but our expertise and experience. So my guess is we would end up probably not being a majority owner of that joint venture because we would not put as much capital in as others. There is a lot of interested parties, other partners beyond China Oceanwide that would be interested in working with Oceanwide and the Genworth. So I think it’s a significant opportunity. And I would say, while we – we will see if Oceanwide can complete their financing. And if they can, we’d move forward with the transaction. But if not, I think there is a reasonable chance, given the relationship we’ve developed over the last 4 years, the work we’ve done on analyzing the market and the entry into the market, that’s a significant opportunity. And if we can’t do the full transaction, I think we’re very open to that as is Oceanwide.

[Ryan Gilbert, BTIG]

Okay, got it. Thank you. Last one for me, the $50 million annualized cost savings. Do you have an idea or can you tell us the split between holding company expense reductions and subsidiary expense reductions?

[Tom McInerney, President and Chief Executive Officer]

There was a split. I’ll ask Dan to give you a little bit more detail on that. Dan?

[Dan Sheehan]

Sorry, I could not hear the question. Could you repeat?

[Tom McInerney, President and Chief Executive Officer]

The question, Dan, was $50 million of expense reductions in January what was subsidiary operating company’s expense reductions versus the corporate overhead? I think that was the question.

[Dan Sheehan]

I don’t have a breakout. What I would say is that there was a significant amount of reduction inside the Life companies, as a result of some of the changes to realign with our expectation going forward for limited sales. And there was a sort of, I would say, a widespread reduction across corporate generally. Those numbers will be numbers that we’ll put forth in the first quarter.

[Tom McInerney, President and Chief Executive Officer]

Yes. And the last thing I would say is we did, I think we have specific reductions that we did in January that resulted in our estimate of cost savings of $50 million, but we’ll continue to look at that. As I said in my remarks, we’re going to need to continue to right-size the organization as we go forward. Obviously, it will depend on which option we would do for U.S. MI. But our goal would be to continue to align our expense base, including overhead with the revenues that the business has generated.

[Ryan Gilbert, BTIG]

Okay, thank you.

[Operator]

Our next question comes from Geoffrey Dunn with Dowling & Partners.

[Geoffrey Dunn, Dowling & Partners]

Thanks. Good morning. A couple of MI questions for you. I appreciate you sharing the singles impact on the premium. Could you further elaborate and share the quarter costs for your XOLs as well as the quarter costs for ILNs?

[Tom McInerney, President and Chief Executive Officer]

I will let Rohit answer those. Good questions, Geoff – Geoffrey.

[Rohit Gupta]

Sure, Tom. Thanks, Geoff. So I think from a reinsurance perspective, we have not outlined the cost in our disclosures, but I would generally articulate the cost being back at pre-COVID levels. And that is for the 2021 excess of loss reinsurance that Dan mentioned in his remarks. And then from an ILN perspective, I would say the same thing that the October ILN that we basically executed after quarter close third quarter, the cost on that ILN was same as pre-COVID levels. And as we look at the month of February and the transactions we have seen in the market, we continue to see the ILN market very robust and the cost being very competitive and attractive for us.

[Geoffrey Dunn, Dowling & Partners]

Okay. And then with respect to your comment on the reserve strengthening, I understand that the average is now up to 7%. Are you saying also that you’re 7% in the fourth quarter? Or was it a higher number than 7% that brought up the average as well as the strengthening charge?

[Rohit Gupta]

Yes. So Geoff, what I would say is we are in an unprecedented environment here when we just think about our overall roll rates and our reserve factors. The forbearance programs we have today are very different than the forbearance programs we used to have pre-COVID. You are familiar with the numbers, less than 5% of our delinquent base used to be in forbearance programs. And as Dan mentioned, right now, 71% of our delinquency at the end of the year are in forbearance programs. Essentially, what we did was, as we were navigating through the year, and we looked at cure rates coming from forbearance delinquencies. We did not see those cure rates navigating to the level that we would have expected based on the choice of roll rates we made earlier in the year. So based on that experience, we decided to increase primarily our forbearance roll rates, and the cumulative number came to 7% for all COVID delinquencies, forbearance and non-forbearance combined at the end of fourth quarter.

[Geoffrey Dunn, Dowling & Partners]

Right. I am asking, I guess, specifically, what was the assumption for Q4, though? What’s kind of your run rate exiting the year? Are you at a 7% assumption, as we go into the beginning of the year or is it a higher number that helped bring up the overall average for the last 9 months?

[Rohit Gupta]

Yes. So we are at 7%, as we end the fourth quarter for COVID delinquencies. And for non-COVID delinquencies, that number would be higher because non-COVID delinquencies were non-forbearance and 7% for news as well.

[Geoffrey Dunn, Dowling & Partners]

So your blended number is about 7%?

[Rohit Gupta]

Yes.

[Geoffrey Dunn, Dowling & Partners]

Okay, thanks.

[Operator]

Ladies and gentlemen, we have time for one final question from Howard Amster with Horizon Group.

[Howard Amster, Horizon Group]

Tom, I think my question was answered, was about the cost savings, where the $50 million was – would come from. So, thank you very much.

[Tom McInerney, President and Chief Executive Officer]

Yes, thanks, Howard.

[Operator]

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

[Tom McInerney, President and Chief Executive Officer]

Thanks, Lauren, and thanks to all of you for joining the call today. In closing, I would just reiterate that we’ve made significant progress towards meeting our debt obligations in 2021, including working towards the potential IPO of the U.S. MI business. We streamlined our cost structure, and we also paid the February debt obligation. We look forward to continuing to execute against our plans to further strengthen our financial position and maximize long-term shareholder value. I’d like to thank our employees, once again, for their outstanding work in a very difficult year 2020. As we move forward through the pandemic, we’ll continue to be prepared for a variety of economic and performance scenarios in our business. And we look forward to updating you on our progress, and thank you all very much for your interest and support of Genworth. And with that, Lauren, I’ll turn the call back over to you.

[Operator]

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