Genworth Financial, Inc.
Q4 2020 Earnings Call Transcript

Published: 17 Feb 2021

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

[Tim Owens:]

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.

[Tom McInerney:]

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.

[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.

[Operator:]

We’ll take our first question from Ryan Krueger with KBW.

[Ryan Krueger:]

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:]

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:]

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:]

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:]

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:]

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:]

Thank you.

[Operator:]

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

[Joshua Esterov:]

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:]

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:]

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:]

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:]

Understood. Thank you everyone for your time.

[Operator:]

We’ll take our next question from Ryan Gilbert with BTIG.

[Ryan Gilbert:]

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:]

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:]

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:]

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:]

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:]

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:]

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:]

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:]

Okay, thank you.

[Operator:]

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

[Geoffrey Dunn:]

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:]

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:]

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:]

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:]

So your blended number is about 7%?

[Rohit Gupta:]

Yes.

[Geoffrey Dunn:]

Okay, thanks.

[Operator:]

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

[Howard Amster:]

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:]

Yes, thanks, Howard.

[Operator:]

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

[Tom McInerney:]

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.