Genworth Financial, Inc.
Q4 2014 Earnings Call Transcript

Published: 11 Feb 2015

[Operator:]

Good morning, ladies and gentlemen, and welcome to Genworth Financial's Fourth Quarter 2014 Earnings Conference Call. My name is Kristy, and I will be your coordinator today. At this time, all participants are in listen-only mode. We will facilitate a question-and-answer session towards the end of this conference call. As a reminder, the conference is being recorded for replay purposes. Also we ask that you refrain from using cell phones, speaker phones or headsets during the Q&A portion of today’s call. I would now like to turn the presentation over to, Amy Corbin, Senior Vice President of Investor Relations. Ms. Corbin, you may proceed.

[Amy Corbin:]

Thank you, operator, and good morning, everyone. Thank you for joining us for Genworth’s fourth quarter 2014 earnings call. In addition to covering our fourth quarter results, we will discuss the long-term care active life margin review and provide an update on our strategic priorities. Our press release and financial supplement were released last evening. Earlier this morning, our fourth quarter earnings summary presentation, along with the investor materials covering the long-term care active life margin review and our strategic priorities were posted to our website. Both of these presentations will be referenced during our call this morning, and we encourage you to review all of these materials. Today, you will hear from our President and Chief Executive Officer, Tom McInerney, followed by Marty Klein, our Chief Financial Officer. Following our prepared comments, we will open the call up for a question-and-answer period. In addition to our speakers, Kevin Schneider, President and CEO of our Global Mortgage Insurance Division will be available to take your questions. With regard to forward-looking statements and the use of non-GAAP financial information, 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 note regarding forward-looking statements in our earnings release and related presentations, as well as the Risk Factors of our most recent Annual Report on Form 10-K and our Form 10-Qs, as filed with the SEC. This morning's discussion also includes non-GAAP financial measures that we believe maybe 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 international protection and international mortgage insurance results, please note that all percentage changes exclude the impact of foreign exchange. And references to statutory results are estimates for the quarter, due to the timing of the filing of the statutory statements. Given the level of interest for today's call, we ask that analysts limit themselves to one question and one follow-up. Should you have additional questions, please re-enter the queue. And now, I'll turn the call over to our CEO, Tom McInerney.

[Tom McInerney:]

Thank you, Amy, and good morning, everyone. Our objectives for this call are to

[Marty Klein:]

Thanks, Tom, and good morning, everyone. This morning, I will discuss our long-term care margin review and impacts related to it. But first, I will briefly review our fourth quarter results. As shown on Slide 3 of the earnings summary, we reported a net operating loss of $416 million and a net loss of $760 million for the quarter. There were several factors impacting the operating loss, which overshadowed solid operating performances in several of our businesses, particularly in our global mortgage insurance division. These items include

[Tom McInerney:]

Now, let me take a minute to discuss in a bit more detail our strategic review and priorities. As discussed already, we have and continue to analyze a range of strategic options to maximize shareholder value. Working with our Board, we have engaged external financial and strategic advisors to assist us in our reviews. We have made candid appraisals of our businesses strengths and weaknesses, and are taking proactive measures to rationalize our overall portfolio. We believe that our mortgage insurance businesses are our strongest businesses and we expect them to continue to perform well in 2015 and beyond. We must continue to take steps to mitigate LTC risks, given the pressures on the older LTC blocks and the impacts we were seeing on sales given rating pressures. To that end, we continue to capitalize on our industry leadership in order to drive regulatory and market changes that are necessary to sustain this business over the long-term. By far, the most important action we can take to make LTC a viable business is to continue to work with all state regulators to seek significant actuarially justified premium rate increases and benefit reductions on the existing in-force LTC blocks. We see that in future premium increases or benefit reductions on the older blocks of business is critical to maintaining positive ALR margins. In addition to securing future premium increases or benefit reductions, we will continue to develop higher return, lower risk new LTC and combo products to address the growing LTC needs and increasing size of the aging U.S. population. And we will press on regulators the need to consider more frequent and smaller premium increases on current and future business as experience dictates. We believe that the results of the cost and portfolio rationalization efforts we are pursuing, will improve our ability to reduce debt levels, increase capital buffers, improve operating earnings and ROE in the life businesses and grow profitable mortgage business. We remain actively engaged with our Board, key stakeholders and external advisors to ensure appropriate evaluation of growth opportunities, capital structure, regulatory actions and rating considerations. We will provide investors with regular progress updates. And now Marty, Kevin Schneider and I are happy to answer your questions.

[Operator:]

Ladies and gentlemen, at this time we will begin the Q&A portion of the call. As a reminder, please refrain from using cell phones, speaker phones or headsets. [Operator Instructions] Jimmy Bhullar from JP Morgan. Your line is open.

[Jimmy Bhullar:]

Hi, good morning. I just had a couple of questions. First, you mentioned the plan to reduce debt by $1 billion or $2 billion. Wondering if you could discuss the sources of cash to the hold co in 2015? Obviously you’re going to get dividends from the Australia and Canadian MI businesses, but what are you going to get at the hold co other than that? I’m assuming that you might not be able to get much dividends from the lifestyle, but - maybe that’s my first question.

[Tom McInerney:]

So let me just take the first part and say that working with our Board and our external financial and strategic advisors, we determine that when we’re looking at all of the options that we might consider to raise shareholder value, we don’t have as much flexibility as we’d like because of the level of debt at the holding company. And so based on working with rating agencies, regulators and our feedback from external advisors, we believe that target of $1 billion to $2 billion of debt reduction at the hold co, frees up a lot of additional options to consider. So as we look at strategic options, we are looking at those that will allow us over time to reduce that debt. I’ll turn it over to Marty I guess, to give you a little bit of specifics in terms of the 2015 operating dividend that we’re expecting.

[Marty Klein:]

Hi Jimmy, it’s Marty. I think we have in our cash plans are really the planned dividends that we have coming from Australia and Canada. As you know, we expect that to be in the range of $150 million to $230 million. And remind you, our annual debt services’ order of magnitude is around $280 million. We’re also obviously going into the year here with significant liquidity at the holding company, probably over close to $350 million to $400 million kind of over our cash buffers. That obviously provides some lift there. So we do anticipate holding company balances to be relatively stable with the dividends we’re getting. Obviously the other thing that we’re working on as we mentioned in the remarks is we are launching our sales process of lifestyle protection. We’re not managing our holding company cash reflecting that, but obviously if we execute that, that will create some upside.

[Jimmy Bhullar:]

And the $1 billion to $2 billion, you’re planning on doing that this year or is it more of a longer term target?

[Tom McInerney:]

So it’s more of a longer term target. And we’re looking at things, as Marty said, like selling LP, as we said last quarter, we’re looking at selling blocks of life annuity. We are looking at our Australia business, and should we sell further down there, that was part of the reason for that PRI tax charge. And now obviously there are other options. But all of those we’re looking at in conjunction with our Board and external advisors to do over the longer term.

[Jimmy Bhullar:]

Yes, but it’s sort of a reasonable assumption that to do any debt pay down you would need to sell assets of the insured businesses, because from the operation - the cash flows are somewhat limited.

[Tom McInerney:]

That’s right, yes.

[Jimmy Bhullar:]

Yes. And then another question just related to that. Are there any implications if you do determine that there is a weakness in internal controls in your ability to do asset sales or do anything else in the short-term?

[Tom McInerney:]

Hi Jimmy, I think this came up really in the third quarter related to our long-term care at disabled life reserve charge and we had a manual process that get introduced for the first time with that adjustment. And that’s really where the issue is. We obviously have been working on addressing that. When we have our 10-K, we’ll provide more details on that ever if it is in fact a material weakness, we’re still assessing that. And then if it is material weakness, we’ll provide remediation plan. I do think that we’re still going through our overall control assessment. So I don’t want to make any conclusions right here, but at this point, I anticipate that if it is a material weakness, it’s pretty isolated to that particular situation. That is the case that we’d anticipate in the broader issues as you described.

[Jimmy Bhullar:]

Okay, thanks. And then just one last one. You did change the permanent reinvestment assertion for Australia. That sort of gives you some flexibility to sell down your stake. Wondering why you did not do that for the Canadian business, and is that something you would consider?

[Tom McInerney:]

Yes. I mean, the first thing I would say on all three MIs is that, we think all three are performing well and they are our strongest businesses. When looking at Australia and Canada, in our holdings of those, we looked at the percentage of ownership that we have of those. We looked at whether the banks in those markets receive explicit or implicit credit for the mortgage insurance. We look at our market share versus competitors and the overall competitive environment. We do think in Canada, there is a potential based on what the housing regulators have said that they may look to reduce the housing authority corporations guarantees and therefore the tax credit exposure. So we think that’s a potential in the Canadian market to grow. And then obviously for management oversight and synergies between Canada and Australia are different. So all of those went in. And so our conclusion was, we’re looking - we haven't made any decisions yet on Australia, but we are looking at options to sell down further. Right at this point, we are not currently looking to sell down in Canada. So that’s the difference in the tax agreement.

[Jimmy Bhullar:]

Okay. Thank you.

[Operator:]

And next we have Suneet Kamath from UBS. Your line is open.

[Suneet Kamath:]

Great, thanks. Good morning. Marty, I was hoping you could help us reconcile the statutory active life margin, in terms of what you showed us in the last presentation and what you’re showing us today, just in terms of the pieces. So you start with the, whatever it was, the $2.6 billion I think. What was the impact of the revised claims assumptions? And then separately what was the impact of the future rate increase benefit that ultimately gets you to, I think what the comparable number is this quarter of $2.1 billion?

[Marty Klein:]

Yes, you’re right. Your beginning and ending balances are right, Suneet. And we called out in my prepared remarks, the pieces on a GAAP basis. And those assumptions are really the same on a cash flow testing basis. We would want a slight change or maybe not the slight change, I’ll speak to it in a moment. I don’t want to get into specific amounts, but the assumptions are the same. The discounting rates a little bit different. So those amounts are roughly the same. I’ll mention those again on a GAAP basis about $5.4 billion negative impact to margins on updated claims termination rates in utilization assumptions, about $1.5 billion for interest rates as decrease to margin. Then on the positive side, about $4.9 billion pre-tax of premium in-force rate actions in the future. And then about - we didn’t really call it out, but roughly $500 million to $600 million of sort of other adjustments. And those kind of really gets you in the GAAP walk. On the statutory side, it’s really those same items. The present value is a little bit different. I think the difference in stat is that with the interest rate approach that we use, it’s different in statutory testing, where we use a variety of randomly generated interest rates and take the average of that and we described in the presentation what that average gets to. That’s obviously a different approach than what we do in GAAP, where we just use our current portfolio rate and use that to discount back the cash flows. Then the other adjustment in statutory which is not reflected in the GAAP margins I was thinking is that new reinvestment strategy I articulated, where we’re over time it really takes a long period of time as we reinvesting in bonds such that the average credit quality in the reinvestment strategy is BBB+. Let's say probably 15, almost 20 years in the models, they get fully into that BBB+ category in average. And then similarly we built in small allocation alternatives that builds up over time. I think it takes 10 to 12 years to get up to the, I think 5% allocation. So those are really the differences on stat and really kind of you think about the $1.5 billion interest rates hit in margin or in GAAP it’s bit less on statutory basis for those regions.

[Suneet Kamath:]

I mean, frankly I think a lot of us are more focused on statutory. So at some point if you could give us a clear reconciliation of how that ALR on a stat basis change, that would be very helpful. And second question I have is on the anticipated rate increases. I guess its Slide 5 of your LTC presentation. So it looks you have prior approved or anticipated rate actions of $380 million to $470 million. But when we think about the $525 million to $625 million of anticipated peak incremental annual premiums, is that in addition to the $380 million to $470 million, or does that include some of the $380 million to $470 million?

[Tom McInerney:]

Yes, that is in addition to the $380 million and $470 million. So those are future premium increases or benefit reductions that will seek over the next 15 years or so. I do want to make a comment there. I’ve been here for two years, and I think there has been a significant change from a regulatory perspective in terms of where the states are. I think two years ago, I think a number of the regulators were still working through what was actuarially justified. I think now there is a recognition based on our recent experience, our experience in competitors that there is a need for significant increases on the old business for us and other companies. And long-term care is a guaranteed renewable policy. So regulators are required to approve appropriate actuarially justified increases. So I think there has been a change over the last two years in terms of how regulators in all the states look at.

[Suneet Kamath:]

Right. And when you say in your prepared remarks that you’ve run these price increases by the regulators. Is that - who specifically is that? Is that just your main insurance regulator? Have you sort of discussed this with all of them that you have to go back to and ask for price increases?

[Marty Klein:]

Yes, Suneet, it’s really with the [indiscernible] of regulators for U.S. Life companies. We do anticipate having a call with all the insurance departments there shortly to go over this type of information. But it’s really in conjunction with consultation with the regulatory council - the regulators that were going to fill other states. I would just point out by the way that one of thing that’s in our future rate actions, which is part of the overall block that we haven't had certainly as much rate actions are in Choice I and Choice II, which really represents about $1.4 billion or the lower $1.4 billion of the overall $2.4 billion of in-force. And as we think about the new claim termination rate and utilization assumptions or updated assumptions that we have, that’s an area where really I think big chunk of the future rate actions comes into play. Historically, we haven't had as much focus on that if you think about the 2007 and 2010 rate actions. They were really contained in the much older blocks.

[Suneet Kamath:]

Got it. Makes sense. And then just a last quick one, just on long-term care. If we back out the charges and then we back out the benefits from the rate actions of, I think, $41 million, it looks like the normalized earnings excluding rate actions for LTC in the quarter was a negative $53 million which is, as far as I’ve been tracking this is the worse quarter we’ve seen. So just any color in terms of what you’re seeing in the core business? Why we saw some significant deterioration relative to what we saw in the third quarter? I would have expected maybe the DLR charge would have improved earnings because you’re sort of frontloading some benefits, but maybe that’s not right.

[Marty Klein:]

Yes, Suneet, let me just - I think the core is really - we can maybe talk about this little bit offline, but the core is a little bit higher. You figured right, it is negative. That’s the first time we’ve seen it negative. There are number of, kind of non-recurring things between the reserves. And the margin impact this time, the adjustment that we’re having in the reserves that we talked about earlier, the error is worth about $44 million. So we do have those things. But you back all that out, it still is a negative P&L number. I think a couple of things are driving that. Really part of it is really related to the new claim reserve assumptions that we’ve put in place at the end of the third quarter and there is a couple of aspects to that. One is as new claims come onto the books, we are now setting up significantly higher reserve than we did in the past. So that’s a pretty big difference that we’re seeing this quarter. And then along those same lines within the claim reserve approach that we have, we had less in the way of reserve releases on existing claims. And again you’ll recall that we updated our claim termination rates. We think people stay on claim longer. So those dynamics this quarter had a pretty big impact on the quarter. I think that obviously has a current period impact presumably if we have the claim reserve right, that needs to be a lot less drag in future periods or hopefully no drag in future periods from the claims that go on the books. Then the final thing I’d say is this quarter we have a fair amount less in reinsurance benefits. I want to say after-tax probably about $15 million less in reinsurance benefits quarter-over-quarter, if that’s helpful.

[Suneet Kamath:]

Got it. Yes, my quarter number just backed up the benefit of the rate actions. That’s how I got from your minus 12 to my number. But thanks again, will follow up.

[Tom McInerney:]

Yes, but the only thing I would say on that is, I think you have to count the premium increase as the benefit reductions we’re getting and there is no question that going forward, we will, based on the new claim termination rates and benefit utilization, we do need to go back to the state on those old blocks and take that into account. And so that’s part of why you need the premium increases to benefit reductions going forward that we laid on Slide 5. So to me that’s a critical part of it. And we obviously would expect - and these are all the numbers that are shown on Page 5 are the annual incremental premiums. And so lot of incremental premiums, or going forward, we think there may be more benefit reduction and premium increases depending what policyholders decide. So I think those are very important to restore the profitability of the in-force long-term care business.

[Suneet Kamath:]

Understood. Thanks for the your time.

[Operator:]

And next we’ll take Sean Dargan with Macquarie. Your line is open.

[Sean Dargan:]

Thank you. Good morning. I just want to follow-up on the present value of future premiums embedded in your margins. As far as I’m aware, you’re the only company assuming future rate increases that have not been either filed or approved, and Tom’s commentary that getting these rate increases are critical, I think puts us even some investors’ mind that you may have to walk away from the estimates of the benefit that you’re going to be getting from these in your margins. So just to be clear, this methodology was signed off by the Delaware regulator in two separate actuarial firms?

[Marty Klein:]

Hi Sean, it’s Marty. Actually I don’t want to really speak to individual companies, but I think actually the number of companies, actually more than a few that do include future rate actions in their GAAP analysis, and the increasingly as we’ve done the research, it looks to be in the statutory basis as well. So I don’t want to talk about specific companies on this call, but certainly can follow-up and give you some direction on that offline. I’d also say that on a statutory basis with exception in New York, that if you look at the guidelines in cash flow testing, they typically point to actuarial guidelines. Then you go to the actuarial guidelines, and they in fact allow for cash flow testing on businesses such as long-term care, which are guaranteed renewal. So then beyond that, we did speak with our - the regulators that are in domiciled states specifically about this. They agreed that it’s appropriate to include it, again with the exception of New York, which does not allow for it. And then after we develop the plan, we then spoke again with them and reviewed it, if that’s helpful.

[Sean Dargan:]

Sure. And the actuarial firms that you mentioned are also okay with this methodology?

[Marty Klein:]

Yes, they’ve reviewed all of our assumptions, including this, and they believe the margin tests in aggregate - our margin results in aggregate are appropriate given the assumptions we used including these.

[Sean Dargan:]

Great. And one follow-up. So you wrote down all goodwill associated with LTC and Life, but you did not write-down DAC or take a DAC charge. Can you just remind us what the difference in accounting is in which you have to impair DAC versus goodwill?

[Marty Klein:]

Certainly. It is a different approach. For us as we test goodwill, it’s really a kind of two-prong test. One is a test I looked at the overall value including the in-force and projected sales. And actually, for a while now, both our life insurance and long-term care lines have failed that particular test. So then you segue to another test that really is very much focused on value of new sales in both, life and long-term care. As you recall, we did personally impair a write-off that some of the goodwill balances and life insurance and long-term care. As we now look at where we are this quarter with potentially reduced sales from where we are given rating issues and some of the other things that we may do and dial-in back sales to preserve capital along with current captions [ph] we decided to write-down all the remaining goodwill. Shifting to DAC, it is a different analysis. That really frankly is part of the overall margin testing. So when you do your GAAP margin testing, if the margins are negative, you then first write-off the DAC. And then after the DAC is written down, you go into the reserves and reset those. So our margins that we saw on the historical GAAP block are still quite positive, and so we are in a situation where we’re writing down DAC. Obviously in the future if we decide to report parts of the long-term care business separately from a GAAP accounting standpoint and certainly investors have different opinions on that if it makes sense to take some of the older business and put it in a different block and report separately, it would be tested separately and it would be DAC write ups in that scenario.

[Sean Dargan:]

Good. Thank you.

[Operator:]

And our next question comes from Ryan Krueger with KBW. Your line is open.

[Ryan Krueger:]

Thanks. Good morning. On the sensitivities you provided to the active life margins, I had a couple of questions there. I guess, first, how should we think about the interplay between the impact of lower interest rates and the lower dividend rate? In other words, if interest rates were lower than your assumption, would that also likely lead to a discount rate reduction on top of that as well?

[Tom McInerney:]

Yes, the discount rate is really a function of interest rates and spreads. Basically it’s effectively the portfolio rate. For GAAP, it’s the current portfolio rate and we just use that all the way through. And for stat, it’s one of the portfolio rate is year-by-year depending on the tests or the scenario that’s being used in the cash flow testing. But it is effectively the portfolio rate. Now obviously the portfolio rate does depend on interest rates, as well as the spreads you’re getting on your portfolio.

[Ryan Krueger:]

Okay, I see. So if interest rates are lower as the portfolio yields comes down, you also lower your discount rates, so there is essentially two impacts?

[Tom McInerney:]

[Ryan Krueger:]

Okay. And then can you - you show that sensitivities is relative to the $4.3 billion statutory margin. That’s before PADs?

[Marty Klein:]

Right.

[Ryan Krueger:]

Can you help us think about what the sensitivities would lead to the number that’s already after the PADs, because that the sensitivities would be lower, have you already assuming some of this I think in the PADs?

[Marty Klein:]

No, I think it’s a very good point. And again after PADs, I think our margins are right around $2.1 billion. The PADs this year are largely for a couple of reasons. One is for future rate actions and the other is really for what we’re expect to have on the asset side or recurring side. So I think you make a good point that close to $2 billion in PADs that we have - or actually $2.2 billion PADs we have, those really go sort of directly to interest rate-related aspects and conservatives in there, as well as rate action PADs.

[Ryan Krueger:]

Got it. Okay. And then if BLAIC - can you give us an update on how much these statutory capital and RBC ratios are at the end of the year in BLAIC and what the anticipated impact of repatriating that will be?

[Marty Klein:]

Sure. BLAIC’s RBC did go up just about 100 basis points during the quarter to about 345% at year-end. The biggest part of that had to do with this tax benefit we got from LPI kind of restructuring. And that really contributed most significantly to BLAIC’s RBC increase this quarter. In addition, there was a smaller timing impact related to a repatriation of some small block of term business that was in there. So BLAIC’s RBC is now 345%. The overall capital level in BLAIC is just over $800 million.

[Ryan Krueger:]

Thank you.

[Operator:]

And our next question comes from Colin Devine with Jefferies. Your line is open.

[Colin Devine:]

Good morning. I guess couple of questions. First, Marty, you intimated the possibility - you are considering a closed block. And based on your comments that there would be a DAC impairment. Is it fair to conclude if we do look at what you define as the old block here, it would fail the margin testing. And so there is a deficiency on that is the first question. Second and perhaps you have Ken Schneider who can talk to this. When you’re looking at changing the investment strategy, how much is that impacting the margin testing you’ve done here? What I’m getting at is how dependent on it - how dependent is the testing on the success of that strategy? So if you can clarify that. And then for Tom. I guess, Tom, I’m scratching my head here because you’re telling me the MI businesses are getting better, and yet I’m looking at your guidance for next year and you’re guiding for lower loss, for weaker loss ratios in both Australia and Canada versus what they had in 2014. So maybe you can reconcile that, since frankly I think you’re forecasting some fairly significant increases in the loss ratios for both of them.

[Marty Klein:]

Well, Colin, let me start off. And on your first question, the historical GAAP block really, except for the acquired block its business really acquired I think ’96 and before. It represents a lot of the older generations as well as the newer generations. It’s every modeled in aggregate. I think it is very fair to say that the older blocks are performing much less well, in fact losing money versus the newer blocks. So in the overall margin that we have on GAAP, clearly that’s - well maybe not that clearly, the function of newer business that has very, very positive margin and that offsets to some extent what would be presumably negative margin in the older blocks. So if we did at some point, and I noticed this was in your note, but take some part of the old long-term care business and report it separately and manage it different, that would likely create a DAC loss. Again we’re looking at a lot of different things right now as Tom mentioned and certainly that would be something that could happen. We’re still assessing that along with a variety of other things. With respect to your second question, I’d say that the reinvestment strategy and cash flow testing, it’s a reinvestment strategy that is pretty typical with insurance companies. We’ve had a very high credit quality portfolio with long-term care, particularly given the long duration nature of it. In fact in the new reinvestment strategy, the credit quality in the very long duration stuff is still very high, but as we are looking to like many other insurance companies feel a little bit more spread, we then intend to reinvest in a little bit lower credit quality things such as the average portfolio with BBB+. Similarly we’d also have had historically covered next to nothing in alternative investments. I think a number of other insurance companies have 3%, 4%, 5%, 6%, 7% in equities or alternatives. So we’ve had historically close to zero. So we’d build that up to about 5%. I think those things in the model, because it’s an reinvestment strategy and it’s a very long duration portfolio, it takes quite a long time and the model is kind of buildup that really make a bigger impact as in the case of the bond portfolio credit quality. I think it takes 15 to 20 years. And on the case of alternatives, it probably takes about dozen years or so to kind of built up to that 5% allocation. Clearly alternative investments have higher return in them than do fixed income bonds these days. That was the model. Now turning over to Tom for your last question.

[Tom McInerney:]

Yes, Colin, I would say that, first of all, we were pleased with the performance of all three of the MIs in 2014. If you look at that one slide that Marty showed in terms of how they performed against the targets, we said at the beginning of the year, that’s all green on that page. I would say, we think they are good businesses, they are performing well. The loss ratios in 2014 were well below what our targets were. And so I think my feeling - I’ll let Kevin talk specifically about 2015 in the guidance, that they were very low. We think over time based on the historical performance in those markets that those loss ratios in 2014 were so good that they are probably not sustainable at that level. We still think 2015 loss ratios will be good, but I’ll turn it over to Kevin to give you some more specifics on 2015.

[Kevin Schneider:]

Yes, Colin, the guidance as made in Marty’s remarks, in Canada, we’re expecting it to be between 20% and 30% next year. Had great experience this year. I think the thing - and to Tom’s point, I don’t think it’s sustainable. It’s still even in our guidance, its well within the range on our pricing expectations in Canada where we price the business. I think we just need - we’re lot of cautious right now as we observe the impact, as we play to 2015 on what the oil prices are going to do to the country. And that’s something we’re watching very closely. We think that’s probably going to cap down the overall home price appreciation experience in Canada. And you might have some pressure relative to that oil price, in fact on overall unemployment. So, like we’re a little bit more cautious on it, but still a solid loss ratio performance. In Australia, we’re targeting at 25% to 30% range in Australia. I guess it’s just lot of same type dynamics via the Australia economy is holding up pretty well, but obviously the RBA is concerned with the strength of that economic growth. They’ve reduced HP - they’ve reduced cash rates as a result of that and cut the rates. So I think they are expecting some challenges to the economy. We think there is absolutely going to be a moderation in home rates down there. We’ve benefited significantly in 2014 from cure rates in Australia where we’ve sold houses and not even experienced any losses associated with it because of the high home price appreciation levels. So I think that’s going to tap down. So still very solid performance, well within our pricing expectations, but it is going to moderate I think off of what have been really two very, very favorable years from a loss ratio perspective. And then the U.S. business is going to grow. It’s going to continue to grow and experience, I think a decent year, in line with Tom’s comments.

[Colin Devine:]

Thank you. One follow-up for Marty. Marty, lifestyle protection. I think you acknowledged that there is going to be a significant loss. I think that was the adjective you used if you’re able to sell it. Given that, why wasn’t the DAC impaired at a minimum? It seems to me effectively you acknowledged that $248 million has gone. So why not - so just clear the DAC filled [ph] in this quarter?

[Marty Klein:]

Yes. Like I said, it would be kind of nice to clear the DAC and some of the stuff, but we do have to follow GAAP accounting rules. I would say that where we’re launching a process the GAAP accounting for this really means to do what you described would really entail calling a discontinued operations. And I think to do a lot of that - so if you have to have a pretty tangible plan where you feel extremely confident that you actually would execute itself within about a year timeframe. And so while we’re launching the sale, and hopefully we’ll be in a position where later in the year we’d be able to actually execute the sale. I think we’re not quite to the point where we can get to that GAAP accounting threshold and do that. I would say that certainly our intent to sell it hopefully later this year. We’ve launched that process. I don’t really want to comment on the valuation we expect to get from LPI, but we do want to make sure, you and our investors and analysts all understand that I think it’s quite likely to be below and probably well below the current GAAP book value. But we’re not really quite at the point yet from a GAAP accounting standpoint when we’re able to make that change in our accounting.

[Colin Devine:]

Okay. Well I hope you can get that in the next quarter. Thanks.

[Marty Klein:]

Well, the farther along we get, the better for us. So we hope we move it along as well too. Thanks, Colin. By the way just to be definitive on your question on the cash flow testing. Yes, we absolutely would pass cash flow testing without this reinvestment strategy handily. So it didn’t have so much of an impact that would negative margins.

[Colin Devine:]

But it is fairly dependent on the assumptions on the new business and it’s still early days for those to be fair too, right?

[Marty Klein:]

Yes. To be fair, absolutely, yes. We called out, I think the impact on a GAAP basis is 4.9. It’s pretty similar on stat, so you can certainly wind it in. And we want the people know what was in that assumption, any amount of premium that’s in that assumption. Absolutely.

[Colin Devine:]

Okay. Thanks.

[Operator:]

And our next question comes from Geoffrey Dunn with Dowling & Partners. Your line is open.

[Geoffrey Dunn:]

Thanks. Good morning. Just a little change in questioning. I was little confused on domestic MI for this quarter. Was there, or was there not an additional loss accrual this quarter?

[Tom McInerney:]

Geoff, there was not an additional loss for accrual. I think what we’ve seen in the U.S. business or we’re continuing to see positive emergence of our early term delinquencies, but we made no adjustments to our factors associated with that. We’re going to continue to watch for sustained performance before we make those adjustments, but we’re probably reserved it sort of the one in six times from a frequency standpoint, trending more towards one in seven, but we need to see more sustained performance on that. And on the other side of it, we still got to be prudent I think as we watch severity, because severity has been kind of sticky. The older adults continue to age. When you look at that altogether, our reserves are performing - our business is performing consistent with our reserve expectations, but we had no adjustment this quarter.

[Geoffrey Dunn:]

Okay. And then you also alluded to discussions with reinsurers. Are there any new reinsurance agreements this quarter and are you still looking at XOL [ph]?

[Tom McInerney:]

We put no reinsurance agreements in place this quarter. We did make some nice progress working in the U.S. business, if that’s your question, with reinsurers and consistent with our plans to be compliant from a PMIER standpoint. I think we’ve made a lot of progress with the reinsurers. Where we stand though is we still don’t have a PMIER standards are not final. Until they’re final, we won't know exactly how they’re going to gauge the insurance. So we’re working on that and good review right now with the GSEs, as well as with our state regulator.

[Geoffrey Dunn:]

Okay. But at this point you still going down the XOL [ph] quota?

[Tom McInerney:]

At this point in time, that would be our approach. Yes.

[Geoffrey Dunn:]

All right, great. Thank you.

[Operator:]

And our next question comes from Steven Schwartz with Raymond James. Your line is open.

[Steven Schwartz:]

Hi, good morning everybody. Lot have already been answered already. Marty, your description of the profit pattern for GAAP on LTC. Are you basically referencing SOP 03-1? Is that how this is going to work?

[Marty Klein:]

Not exactly in those ordering, but of course it would come up, because it is new phenomenon for us. And again what we’re seeing here in our margin testing for GAAP is the kind of expected pattern of earnings is over the next 15 or 16 years, we have positive earnings and then it becomes negative after that, kind of under the way we’ve been reporting. And as those losses kick in after about year ’15 or ’16, the present value of those losses is about $1.2 billion. You take the $3.5 billion positive and $1.2 billion negative, you still have positive margin of $2.3 billion. But under GAAP accounting, when you have a period in the future where there are losses, you do need to accrue a liability for that. Beyond that, there is not really any clear GAAP accounting guidance on exactly how to do that. So we’re working with our accounting teams and our auditors to develop the approach. And again, I think there could be a variety of approaches depending on how we decide to do it and working in conjunction with our auditors. I think what we’d anticipate doing is taking - given that we now have a different view of severity on existing book, we would probably take of the future rate actions on these existing book that we’re tending to get. And rather than having normal courses, we do have that all hit the bottom line as we get those additional premiums or as we get reserve releases. We’d rather take some of that benefit and spread - and fund that liability for those future losses. Again I’d remind you that this really relates to the block business we have at the point of time we did the cash flow - I’m sorry, the margin testings we’ve had at year-end. So any new business that we would write is really not part of this, that’s really reflective of the block that we have on the books right now, but basically what will take is part of the benefits we get from future rate actions rather hitting the bottom line. We’ll take some of that and build up an incremental liability to fund those losses, so that $1.2 billion losses would be effectively zero at a liability we build up.

[Steven Schwartz:]

Okay. So the use of benefit factors and what have you that you might do for GMIB or SUL is not necessarily - that’s not necessarily the way it’s going to work?

[Marty Klein:]

No, not at all. This is all within the existing block that we have at long-term care. And basically, as we’re projecting forward, we would take our new view of claims which creates the losses in future years along with our new view of future rate actions and kind of change the accounting recognition for those future rate actions, so that some of that would be building up as a liability reserve, if you will, against those going through losses, but it’s all within the long-term care line of business.

[Steven Schwartz:]

Right. Yes, I understood that. I guess my question, it goes back to - I don’t have the page number on here, Page 3 of the long-term care insurance annual margin testing. The present value future claims and expenses is $40.7 million. The present value of future premiums is $27.3 million on the HGAAP lock.

[Marty Klein:]

Yes.

[Steven Schwartz:]

Does that mean I’m going to have a benefit ratio, benefits divided by premium of, I think that’s 150%?

[Marty Klein:]

Yes, I’m not sure I look at quite like that. I think what - in fact this doesn’t really change the margin. So I think what it does is it changes the pattern of GAAP earnings recognition for the future rate actions. And I think that’s maybe way to think about it where if we did nothing we’d get these future - just to go in the status quo where we would change nothing. What we’d see is over the next 15 or 16 years, we’d get these additional premiums or reserve releases that would just benefits and that would hit the bottom line and that would help benefit the next 15 or 16 years. But then you get into those later periods beyond 15 or 16 years, and a lot of that benefit what already have been recognized in our GAAP P&L. And then you’ve got these higher claims, given our new severity - updated severity assumptions and those higher severity expectations would lead to losses in future years. So rather than doing that, what we need to do is set up accrual for a liability to fund that period of time when there are those future losses. And the way that we’ll do that is we will not recognize the full benefit of those additional premiums or the full benefit of reserve releases, but rather we’ll recognize one part of that benefit and then set aside the remainder of that benefit and kind of accrue and reserve for a liability against those losses.

[Steven Schwartz:]

All right, so different profit liabilities what you’ll set up. Okay. And then for Tom. I can't find the number here, but I thought I saw that the debt to total capital is currently 25.9%. Was that correct?

[Tom McInerney:]

That’s correct.

[Steven Schwartz:]

That doesn’t strike me as ridiculously high. I mean, all other companies are around 25%. I don’t really understand why you think you really need some significant action here?

[Tom McInerney:]

So again I would say Steven that it’s based on the options we’re considering, including a number of investors and shareholders over time have talked about a split, and with $4.6 billion of debt at the holding company, and today Australia and Canada being the primary sources of cash capital to service the debt, our feeling is to have a broader array of options that we could consider. Again, we have made no decisions on any of these. We believe we have more flexibility if the debt was $1 billion to $2 billion lower than what it is today. We have talked to the rating agencies, we’ve talked to regulators and certainly we’ve heard from a number of investors over time. And I do think that given the level of debt and given today’s payors, if you will, the debt service. Now USMI, we think in a few years as it builds earnings on the unassigned surplus from the loss years goes away, it will also be a payor of dividends. We don’t think we have a long-term care. We are looking to improve the RBC capital supporting long-term care. And therefore we don’t expect a lot of ability at least in the next few years to pay dividends. So it’s really to have flexibility to consider a broad array of options that are feasible we believe, and our outside financial advisors have also confirmed that we have to reduce the debt around that range, given the current cash capital generation of our operating subsidiary.

[Steven Schwartz:]

Tom, you referenced a split. I assume you were referencing the potential splitting MI from the life insurance operations. Would that be correct?

[Tom McInerney:]

Right. A number of investors and others have talked about that.

[Steven Schwartz:]

Sure. Okay. Thank you.

[Marty Klein:]

But again, we haven't made any decisions. And I think the debt pay down Tom talked about would be designed to give us flexibility to do other options whatever they are, but I think they are current earning streams that make the businesses, I think the debt level is quite manageable, but what we would like to do is pay down a billion or a couple of billion to have more strategic flexibility, if you will. But I think with the status quo what we have, well, it’s a little bit more than we’d like, we certainly think it’s very manageable with the flows that we will be getting from Canada, Australia, USMI come back over time. And US Life, we’re going to really sit tight on as far as dividends for the next year or two and lift that capital base still back up.

[Steven Schwartz:]

Okay. Thank you.

[Operator:]

And ladies and gentlemen, we have time for one final question. And it comes from Scott Frost from Bank of America. Your line is open.

[Scott Frost:]

Hi, thanks. Just wanted to make sure I understood this on Slide 3. You’re talking about, for example the $42.7 billion is the PV future claims. You’re saying that increased by $5.4 billion. Is that what you called out in the release, and then you were offsetting that by $4.9 billion of additional premium increases? And this leads us to the second question here. Is that right way to - am I thinking about that the right way?

[Marty Klein:]

Right. The $5.4 billion is really represented in the present value future claims in expenses line.

[Scott Frost:]

Okay.

[Marty Klein:]

So that’s larger by that $5.4 billion. Again there is one distinction on the GAAP versus stat. One is GAAP is pre-tax and the $5.4 billion is a pre-tax number. And then similarly the additional premiums, $4.9 billion pre-tax of future premium benefits are really reflected in the present value future premiums row.

[Scott Frost:]

Okay. Now, that’s what I wanted to ask you about. You talked about earlier the premium increases that you’re going to get, that have already been approved, plus incremental expected additional premiums. It looks like about - if I look at sort of midpoint, it looks like a $1 billion annually or whatever, is what you’re supposed to be getting. Am I assuming kind of a similar ratio in that $4.9 billion of rate increases you’ve already gotten versus rate increases you expect to get?

[Marty Klein:]

Yes, to be clear and I’ll refer folks to, I guess, it’s Slide 5, that $4.9 billion of benefit of pre-tax to margin reference is really associated just with the incremental premium that we’d get in the future at its peak. That’s $525 million to $625 million. What happens as we implement that, look at that in our modeling? It kind of builds up over time and takes us about 15 years to really get that fully implemented. So it ramps up pretty slowly. And then actually it ramps down pretty quickly as the number of active lines paying their premium comes. So it’s really just about four, five, six years where we’re getting additional premium in the neighborhood. But the $4.9 billion is associated only with that, what we say, anticipated peak actual additional premium. So the other premium that we referenced that we’ve gotten to-date, the $380 million to $470 million, is really I’m just trying to get the context for folks about what we’ve already achieved just in the last few years with these rate actions. That’s already because it’s improved. That had already been built in to our margin testing.

[Scott Frost:]

Okay. Just, I guess, I should have asked more simply. Of the $4.9 billion of premiums you expect to get, how much of that is already been done?

[Marty Klein:]

That’s all in the future.

[Scott Frost:]

That’s all in the future, so…

[Marty Klein:]

That’s all in the future.

[Scott Frost:]

That has to be requested from regulators and approved. Am I correct?

[Marty Klein:]

That’s right. Yes. That is right.

[Scott Frost:]

Okay. For your debt reduction, what I count - it sounds like over time I’m looking at your debt maturity schedule. It looks like you’ve got $300 million due in ‘16, $600 million in ‘18, $400 million in ‘20. I mean is that the time period I’m thinking about for your debt reduction plan. Is it normal amortization? Is that the time horizon we’re talking about? And do you consider the 6.15%, so 66% to junior subs, is that contemplated as part of the plan of reduction?

[Marty Klein:]

There is different ways to pay down the debt. One is just with the passage of time, really just pay off the maturities. And really the next two maturities we have are $300 million and $600 million, respectively. That’s certainly one way to do it. I think what Tom described as we look at the strategy is what - is there anything we should be doing differently in the options we should be look at that if we did choose those, those might accelerate those pay downs, that if we sold the business or did something different or put something in runoff or a variety of different things, will that create some capital level, give us the opportunity to do something quicker, if it made sense to do any kind of scenario. So obviously how we think about the pay down of debt is going to be a function of what we decide to do strategically in a very intertwined.

[Scott Frost:]

So again that sounds like that applies tenders or open market purchases?

[Marty Klein:]

Yes, if we did do that. You’re exactly right. For example, we sold a business and had some capital, we might then say, well, let's rather than waiting for maturity we might then do a tender. And again we have different, obviously tenders with different maturities and different costs. And we’d look at all that and that particular market decides, if we want to do a tender or some open market purchases or what have you.

[Scott Frost:]

Okay, great. Thanks a lot. That’s it from me.

[Marty Klein:]

Thank you for your question.

[Operator:]

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

[Tom McInerney:]

Thank you, Kristy. And again, thank you for all - everybody on the phone today for your time and your questions. And although we may not have answered every question about all of our future actions, we hope you have a sense of our focus and priorities and that you found today’s discussion helpful. While our challenges are both complex and substantial, we are confident our actions to-date and the strategic review of future actions that we’re now looking at, will serve to continue to grow our mortgage insurance businesses, will rationalize our life insurance business, while leveraging our leading position in long-term care to significantly improve in-force profitability and improve the way the LTC industry has regulated. I can assure you that our management team is focused and determined to transform and build value in Genworth’s businesses for the benefit of all of our stakeholders. Thank you very much.

[Operator:]

Ladies and gentlemen, this concludes Genworth Financial’s Fourth Quarter Earnings Conference Call. Thank you for your participation. At this time, the call will end.