Good morning, ladies and gentlemen, and welcome to Genworth Financial's First Quarter 2019 Earnings Conference Call. My name is Kleena, 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, this conference is being recorded for replay purposes. Also, we ask that you refrain from using cell phones, speakerphones or headsets during the Q&A portion of today's call. I would now like to turn the presentation over to Tim Owens, Vice President of Investor Relations. Mr. Owens, you may proceed.

Thank you, operator. Good morning, everyone and thank you for joining Genworth's first quarter 2019 earnings call. Our press release and financial supplement were released last night. In this morning, our earnings presentation was posted to our website and will be referenced during our call. We encourage you to review all of these materials. Today you will hear from our President and Chief Executive Officer, Tom McInerney followed by Kelly Groh, our Chief Financial Officer. Following our prepared comments, we will open-up the call for a question-and-answer period. In addition to our speakers Kevin Schneider, Chief Operating Officer; and Dan Sheehan, Chief Investment Officer will be available to take your questions. During the call this morning, we may make various forward-looking statements. Our actual results may differ materially from such statements. We advise you to read the cautionary notes regarding forward-looking statements in our earnings release and related presentation as well as the risk factors in 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 maybe more 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, we talk about the results of our international 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 the filing of the statutory statements. And now, I'll turn the call over to our CEO, Tom McInerney.

Good morning, and thank you for joining our call. Today, we will provide you with a review of Genworth's strong first quarter results and execution against our strategic priorities and an update on the transaction with Oceanwide. First, a brief review of our results. In the first quarter, Genworth generated $121 million in adjusted operating income, or $0.24 per diluted share compared with adjusted operating income of $125 million, or $0.25 per diluted share in the prior-year period. Our global mortgage insurance businesses continue to drive our overall operating performance with strong growth in our U.S. business. In U.S. MI first quarter adjusted operating income increased 12% year-over-year to $124 million, driven primarily by strong premium growth from higher insurance in force and favorable loss performance. In the quarter U.S. MI generated $9.6 billion in new insurance written or NIW, as a result of its continued ability to maintain and grow share in the U.S. market. U.S. MI's capital position remains strong ending the quarter with over $600 million in capital above the revised PMIERs requirements, which became effective on March 31. In Canada, adjusted operating income for the first quarter declined 10% year-over-year excluding the impact of foreign exchange to $41 million on lower earned premium and an increase in expenses. Canada's capital ratio remains well above requirements and our management targets. In Australia, adjusted operating income for the first quarter declined 26% year-over-year excluding the impact of foreign exchange to $14 million, primarily driven by lower premiums due to portfolio seasoning. Our Life Insurance segment recorded an operating loss of $5 million flat with first quarter of 2018. Higher LTC premiums and benefit reductions as a result of our in force rate actions, as well as strong equity market performance and lower mortality in our life insurance products…

Thanks, Tom, and good morning, everyone. Today, I will cover more detail on our first quarter financial results and key drivers, capital levels in our businesses and updates around cash and flexibility at our holding company as the transaction with Oceanwide has extended. Let's begin with this quarter's financial performance. We reported net income for the quarter of $174 million and an adjusted operating income of $121 million. Our mortgage insurance businesses continue to perform well with strong loss ratio performance in the U.S. and Canada and solid capital levels in all the mortgage insurance businesses. Our U.S. Life and Runoff business results were improved collectively with good in force rate action results, term life mortality experience and equity market performance. Our strong results in our mortgage insurance businesses continue to reflect an overall solid macroeconomic environment including steady economic growth, low unemployment and interest rate levels and stable housing trends in most markets and at home price levels where we generally provide mortgage insurance coverage. Our very strong adjusted operating income of $124 million in our U.S. mortgage insurance business reflected an 8% first quarter reported loss ratio, compared to 7% last quarter. New delinquencies for the quarter were down modestly on a sequential basis, reflecting seasonality. We also saw favorable net cures and aging. Overall insurance in force in USMI continues to grow reaching an all time high of $170 billion at the end of first quarter 2019. This was up 10% versus last year and reflects strong levels of new insurance written as well as good persistency trends. The U.S. purchase origination market was down versus the prior quarter from seasonality and flat versus the prior year. Our new insurance written or NIW for the quarter was $9.6 billion, up 3% sequentially and 7% versus the prior…

Ladies and gentlemen, we will now begin the Q&A portion of the call. [Operator Instructions] Our first question comes from Ryan Krueger from KBW.

Hi good morning. First on Canada, can you just talk about when the Canadian review started? And have you had any contact with them since you met in early February?

Thanks for the question Ryan. I mean obviously we originally filed with Canada shortly after we signed the deal so we signed in October of 2016. I think we did the Form A filings there end of the year in 2016. Of course, there have been changes to the deal along the way. We refilled with a contingency plan capital, plan from Oceanwide. There are some changes by Delaware there is a CFIUS update. So you could look at it from their perspective that the deal has changed along the way. So I think they -- and we started more significant discussions in January and we used -- one of the advantages we have is we spent significant time with CFIUS and it's also like in Canada complex mitigation plan that has a lot of different pieces to it. And so we had discussions with them, several meetings as I mentioned the last was early February. What my understanding is they have said they have all the information they need. Unfortunately, they haven't really given us a time frame for when they will finish the review. And there are several different agencies that are reviewing the mitigation plan and the filing overall.

Okay. Thanks. And then the second question was within any of the regulatory approvals or the merger agreement, can you just remind us are there any requirements in terms of specifics towards China Oceanwide's financial conditions or -- and are they required to hold any sort of assets in any escrow accounts?

No. There are none of those requirements. Clearly, as time goes on and we have year-end 2018 financials and I'm sure those when they're finished by China Oceanwide they will be submitted to all the regulators. Virginia is our lead regulator and they're coordinating with all the other regulators and with us. Obviously, they're here based in Richmond where we are so it's very convenient for us to have all those discussions. Virginia has been very supportive of the transaction. They've of course approved it. And so we -- in addition to our work with our teams with all of the regulators keeping them all up-to-date Virginia is also coordinating from an overall regulatory perspective. But there are no specific requirements obviously. The regulators until the deal closes, they'll continue to review anything that's new and new information. That's sort of the normal course.

Does -- I guess similar to question about China Oceanwide, but do they have I guess liquid assets currently in excess of the purchase price?

So Ryan they -- in the Delaware hearing a significant part of the focus of the hearing was on China Oceanwide financial resources. And so they -- as part of the filings with all the regulators plus as updated by China Oceanwide representatives they went through all that. We obviously have been doing our own due diligence and so they have significant financial assets and cash. One of the challenges that we still have is ultimately once we wrap up with Canada is the Chinese regulators will have to decide how much of the purchase price can come from the assets that China Oceanwide has and -- Mainland China versus offshore. And as you recall one of -- along the way or year or so ago I think that we worked on a contingent plan. So I think both China Oceanwide and Genworth have worked on a plan so that we feel very comfortable regardless of how save comes out in terms of the conversion of the currency and the funding. We have both our original plan. We have all of the proceeds coming from the excess assets and excess cash in China. But we also have a contingent plan if we -- if the regulators in China put a limit on that. So we feel very comfortable both Oceanwide and Genworth that the $2.7 billion is -- there are assets both within China and outside that are more than adequate to fund the transaction and also to fund the $1.5 billion capital plan.

Okay. Thank you.

[Operator Instructions] The next question comes from Tom Gallagher from Evercore. Please go ahead.

Good morning. Kelly your comment on RBC potentially going down just given the lag between the rate approvals and the benefits there versus a more immediate potential strengthening of gross long-term care reserves. Based on what you're seeing right now, would you anticipate a meaningful impact to RBC? And I guess if it is, is there a contingency plan like do you think you'd be able to file for a permit to practice, particularly if you think the regulators see that its truly just a time -- a timing issue?

Thanks for the question, Tom and good morning. I think it's a great question. We are -- we continually look at our risk-based capital forecast in our operating plans over a multiyear time horizon. Permit to practices similar to what GE had done on their very large increase are a certain things that we would consider to talk to the regulators over time. It depends on the facts and circumstances that we run into at that period of time. But as you saw in the first quarter, we started putting up higher average claims and it will take time to file and then implement the rate actions associated with those higher claim levels. Now regarding our forecast, right now, we don't have a forecast that shows us going into a scenario where it would require us to submit a plan of action with our regulators. So, it is a discussion we would continue to have with our regulators, but our forecast currently does not show that.

Okay. Thanks. And then, just on that same topic, can you talk a bit about what kind of change there was percentage terms? Was it a meaningful increase in both severity and frequency in terms of the long-term care claims? I think if I look back to your 2018 filing, frequency didn't change too much. It was -- severity was up in the teens. Can you quantify at all what kind of trend change you saw in the first quarter?

Tom, I don't have that in front of me right now. We'd be happy to evaluate whether or not there's a meaningful information that investors could gain from that and figure out what level of granularity. We can also look at if there's anything in our 10-Q that would be adequate when we file that, so we'll have to get back to you on that one.

Okay. Great. And then, just as it relates to the rate increases, you've clearly been having more success there. If you look at 2017, it was a little less than 30%, 45% in 2018 and now to start the year you're at 60% rate increase weighted average. Is there -- can you talk a little bit about what's going on with the states? Is that -- are we seeing that level because some of the bottlenecks for states that weren't grading rate increases are now coming through? Or are you actually seeing just higher across-the-board rate increases occurring? And where would you expect that trend to go?

So, John, that's a great question and it's a complex question, because every state and the District of Columbia, so 51 jurisdictions does it somewhat differently. I do think from -- if you look back over the last five or six years 2013 and 2014 I think it was difficult receiving the large increases, triple-digit type increases from any of the states. I think that has changed. I think over the last five or six years Genworth and all of the other long-term care insurers with legacy blocks have provided a lot of information to the regulators, and so I would say all regulators recognize that there are significant needs for actuarially justified premium increases. I would say generally there has been 40 to 45 states who are doing significantly well from our perspective and I think other insurers' perspective and really stepping up and giving significant premium increases on some policy forms where over 200% cumulative increases. And I think we've said in the past that the most problematic legacy policies are those that have unlimited number of years of coverage and 5% compound inflation protection and that we need 300% type increases. And so, if you look at our cumulative net present value of $11 billion now at the end of the first quarter versus original target that has grown, but it's at $16.5 billion. We're around two-thirds and if you look at the average from those 40 to 45 states, we're in pretty good shape. There are some states that are behind. And so, I do believe that one of the challenges in the industry and among the 50 states is, there are some states that are very far along in giving very significant premium increases to Genworth and to other companies and then there are other states that are well behind. And I do think there is pressure coming from the majority of states against those few states that have -- are behind. And so, I do think you will see, and in some cases your hypothesis was right that some of the large increases that we've received lately have come from states that have ways to catch up. And I think ultimately all the regulators and the NAIC, I think really have to, in my perspective, figure out a more consistent basis for granting premium increases now that I think there's no question that these increases are needed and are actuarially justified. But we don't have homogeneity across all the states in terms of how they do it. Everyone is somewhat different. And so I do think more and more states that are in pretty good shape along the way, they have more to do, but they've been really I think have done a great job in terms of managing this. And I think they need to put some pressure on their fellow regulators and commissioners to step-up more. And so, hopefully we'll see that.

That’s helpful. Thanks, Tom.

[Operator Instructions] The next question comes from Jimmy Bhullar from JPMorgan. Please go ahead.

Hi, good morning. I joined the call late, so I don't know if you covered this topic. But can you sort of talk about if there's a possibility that if the merger approval process continues toward the acquisition approval continues to get delayed, is there a point at which you might need to go and re-seek the approval that you've already obtained? So is there an expiration date or is there a way for the regulators to sort of ask you to restart the process beyond a certain point?

Jimmy, that's a good question, and there have been questions before you joined on the deal progress, but that specific question hasn't come up. What I would say is that we have a lead regulator Virginia that has approved the deal, and it's coordinating with all the regulators. And we have a specific team led by our General Counsel or Bob who has focused discussions with all the regulators. So I think we really kept all the regulators up to speed. I think the regulators that have approved the deal remain very supportive of the transaction. Obviously, we will update them along the way. Obviously, each quarter we have financial statements that we release so we provide those. And then my expectation would be that Oceanwide -- some of the public companies that file in 2018 sometime in May those financials become available and I think we'll submit those. But I do not see any of the other regulators who've already approved undoing their approval, if you will. I think they'll continue to want to see new information just with the passage of time. And I think the focus now really is on Canada and we discussed that on the previous question, but we've learned in the CFIUS process that it takes time to go through these mitigation plans. It's not something that any of these regulators, including Canada have broad experience in so it's new. We were fortunate. In the case of Canada, we had a very good model in CFIUS. I think that was a very good strong mitigation plan. So that's the basis that we've used. We've gone back and forth with Canada. What I said on the call earlier is that the last meeting we had with them was in early February. At that time they told us that they had the information they needed to review the transaction. Obviously, we extended again to June 30, and we think that it should be enough time for them to finish their process. And it's really Canada that's left, and I think the other regulators that have already approved are still very supportive of the deal.

And then can you share any insight that you have on Oceanwide financing for the transaction? I don't think there's an escrow account with the money sitting in, but do you have any views on how they're going to finance it?

Yes. So that question did come up before. It's a good question. So in the process both Genworth and all the regulators have done due diligence on China Oceanwide and the funding, and there is significant excess cash and capital within Mainland, China that China Oceanwide has. As you know, I've talked about this before. Several months ago maybe even a year ago, we did come up with a contingency plan that -- to the extent that safe ultimately limits the amount of currency conversion within Mainland, China. Oceanwide does have a contingent plan that has cash and other capital as well as financing outside of China. So we believe that whether the deal is funded primarily from China or outside under the contingency plan that Oceanwide is in very good shape in terms of being prepared once we get the final approvals from Canada to move forward and close the deal that they have adequate cash and capital to not only provide the purchase price of $2.7 billion, but also the $1.5 billion capital that's due over time post the closing.

Okay. Thank you. Good luck.

Thank you Jimmy.

The next question is from Alex Scott from Goldman Sachs. Please go ahead.

Hi. I just had a quick one on long-term care. I know that the regulators had some, I guess, enhanced disclosure on the actuarial guidance 51 that was issued for year-end 2018. I'd just be interested in any feedback you got through that process. I think there was a focus on morbidity assumptions and more specifically incidence curves. So I would be interested if you got any color in terms of how are some of those assumptions compared to the industry and through that process?

Thanks for the question Alex. I think those conversations are ongoing. All the carriers just recently submitted their cash flow testing memorandum, and I think the regulators are methodically looking through all of that and having discussions. We feel like we're very compliant with actuarial guideline 51 and that all of our methods are very supportable based on our experience, and with appropriate provisions for adverse deviation.

All right. Thank you.

As there are no further question signals. I will now turn the call back to your host Mr. McInerney.

Thank you very much Kleena, and thanks to all of you for your time and questions today. We appreciate your continued investment and interest in Genworth. And we recognize that the Oceanwide transaction approval process has been very frustrating, and it's obviously taken longer than any of us expected. But please be assured that Oceanwide and Genworth are working very hard to close the transaction as soon as possible. And thank you very much for being on the call this morning.

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