Good morning ladies and gentlemen, and welcome to the Genworth Financial's Third Quarter 2020 Earnings Conference Call. My name is Jennifer and I will be your coordinator today. At this time, all participants are in a 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 [Operator Instructions] I would now like to turn the presentation over to Tim Owens, Vice President of Investor Relations, Mr. Owens. You may proceed.

Good morning, and thank you for joining Genworth's third quarter 2020 earnings call. Our speakers are once again remote this morning, so please excuse any sound quality or technical issues that may arise. Our press release and financial supplement were released last night and this morning, our earnings presentation was posted to our website and will be referenced during our call. We encourage you to review all of these materials. Today, you will hear from our President and Chief Executive Officer, Tom McInerney; followed by Dan Sheehan, our Chief Financial Officer and Chief Investment Officer. 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, will be available to take your questions. During the call this morning, we may make various forward-looking statements. Our actual results may differ materially from such statements. We advise you to read the cautionary notes regarding forward-looking statements in our earnings release and related presentation as well as the risk factors of our most recent annual report on Form 10-K as filed with the SEC. This morning's discussion also includes non-GAAP financial measures that we believe may be meaningful to investors. In our financial supplement, earnings release and investor materials, non-GAAP measures have been reconciled to GAAP where required in accordance with SEC rules. Also, when we talk about results of our Australia business, please note that all percentage changes exclude the impact of foreign exchange. 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 President and CEO, Tom McInerney.

Thank you very much, Tim. Good morning everyone, and thank you for joining our call. First, I'd like to discuss the status of our pending transaction with Oceanwide. Then I'll touch on progress across several Genworth's other strategic priorities and provide a brief overview of our strong third quarter results before turning the call over to Dan Shan, Genworth's Chief Financial and Investment Officer. Earlier this week, Genworth announced that Oceanwide had made significant progress towards the Hony Capital funding and other requirements in order to close the Oceanwide transaction. As indicated in the documentation submitted to Genworth, Hony Capital expects to be able to finalize the $1.8 billion financing in November. Oceanwide is also focused on the funds in Mainland China that will provide the remaining amount of capital required to pay for the total purchase price of $5.43 per share, so that we can close the transaction by November 30th, subject to timely receipt of regulatory approvals and clearances. Additionally, Oceanwide had made progress in the China regulatory process, submitting updated information and requesting confirmation of the extension of the acceptance of the filing from the Chinese National Development and Reform Commission or NDRC. We are extremely pleased with Oceanwide's progress and update. Genworth's Chairman, Jim Riepe, and I have maintained regular communication with Chairman LU and Oceanwide throughout this process, and we will continue to maintain a dialog with them as they were to complete the remaining steps to close. We are hopeful that Oceanwide's transaction funding will be completed in time to close the transaction by November 30, without the need for an additional extension. We look forward to providing further updates as we work toward a successful closing of the transaction. In parallel with the transaction process, we have remained focused on executing well and…

Thanks, Tom, and good morning, everyone. Today, I will cover our financial results for the third quarter, capital positions of our subsidiaries and holding company liquidity. While we continue to face challenges created by the pandemic, I'm pleased with the overall progress made in each of these areas during the quarter with improved earnings, 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 $418 million and adjusted operating income of $132 million. The primary driver of the difference between adjusted operating income and net income was $250 million of net gains from the sale of US Treasury Strips in our life insurance business as we continue to reposition the portfolio at a time when the market value of those securities had appreciated significantly. The US mortgage and housing market has remained resilient through this period of uncertainty with improving home prices, a very large origination market and moderating delinquencies from the earlier peak. Our USMI business has benefited from its participation in this market, which includes strong underlying mortgage credit quality fundamentals. We're pleased with the performance of the business and the improvement in delinquency and loss trends. USMI's third quarter financial results improved sequentially, primarily driven by lower levels of new delinquencies and incurred but not reported reserve or IBNR favorability. For the quarter, USMI had adjusted operating income of $141 million and reported a loss ratio of 18%. While new primary delinquencies during the third quarter were still elevated versus pre-COVID levels, they were down 66% sequentially, with approximately 75% of new primary delinquencies being reported in forbearance plans, which may cure at an elevated rate. Our assumed eventual claim rate or roll rate for the quarter's new delinquencies once…

[Operator Instructions] We'll go first to Howard Mills with Deloitte.

No, I'm sorry, I did not intend to ask question. Thank you.

[Operator Instructions] We'll go next to Stan Mercer [ph]. Stan, your line is open.

I did not intend to ask a question, I'm sorry.

We'll go next to Sean Perkins with Waterfall Asset Management.

Thanks for having the call, guys. I just wanted to clarify a couple of things related to potential Oceanwide closing and/or the potential IPO -- equity IPO of the USMI subsidiary. Could we walk through the sequencing of those events, if possible at all?

Sure, Sean. Thanks for the question. So as we disclosed earlier in the week, based on information promotion wide and documentation that is submitted to Genworth, we expect that the Hony Capital funding will occur in November, and they're gathering the funds. I mean, obviously, they have a lot of different sources of cash in Mainland China. So they're gathering that to put it in an account. But they do need approval -- re-approval, if you will, from the NDRC and say best to authorized exchange. Based on everything we know, we're hopeful that we can close by the end of the month with no need for an extension. On the USMI IPO, we're continuing to operate assuming there isn't a deal closed, obviously, to be cautious, although we're cautiously optimistic that we will be able to close the deal. And so we're doing all the steps, the filings that have to be done with SEC, there [indiscernible] up here, etcetera, I think probably a lot of them on the call are familiar with that. And so our view is that we would be in a position to launch an IPO, subject to market conditions. Right now, they're pretty positive. And obviously, the USMI business is doing well, recovering from COVID-19. And so our current plans, if there is no deal, would be to launch an IPO sometime in the first half of next year.

Got it. And in such that they're mutually exclusive, is there any scenario in which you would closed China Oceanwide transaction and still move forward with any form of IPO of USMI?

I mean -- yes, that's another good question, Sean. I would say, look, I think that USMI is a valuable business. I would say we're disappointed on the management team that the rating agencies don't give us full credit for the terrific performance of our USMI business. I mean I think the team there -- I've been here eight years now, almost. And the team there has had, I think, awesome results over the last eight years. They continue to do very well on the earnings side. They've got significant excess capital, above PMIERs requirements. As Dan mentioned, if you conclude the ILN deal we did in the fourth quarter, we're at 147%. So I don't know why the U.S. MI ratings aren't higher. Whether we do the deal or not, one of the things that we're working with the rating agencies and to some degree the GSEs on is, if we did have an IPO, so there's some public float for USMI that should be a significant positive for ratings. And I think the ratings should be higher and more consistent with our competitors, given the performance of USMI is equal or better than most of our competitors. So that is -- it's possible. it'll be up to the -- obviously, the new goal post closing, but there is a possibility that we would decide to do the IPO anyway. If by doing that, that allows us to get to the ratings that we think we deserve now, if that makes sense.

Yes, it does, and I really appreciate that disclosure. As it relates to the -- just on the AXA settlement, would there be any proceeds from the China Oceanwide closing that have been earmarked or would be earmarked for any form of the same on the AXA settlement?

Another good question, Sean. So the -- in the Oceanwide closing, we think that will close by the end of the month. We do provide in the transaction that there's $1.5 billion of new capital coming into Genworth, apart from the purchase price, the $2.7 billion that goes to shareholders at $5.43 per share. But the $1.5 billion that's going to come in three tranches of $500 million each, one at the end of January of '21, one at the end of April, one at the end of July. And so, we believe with the $814 million of cash we have on hand, with that $1.5 billion, potentially an IPO, as we just talked about, Sean. But those -- the cash of $814 million and $1.5 million, that's $2.3 billion. And so we think that, that is -- will go towards reducing the liabilities of the 2021 debt, which is around $1 billion. And then we owe AXA under the note in two tranches in 2022. And then -- so that is the expectation in terms of what proceeds from the further investment by Oceanwide, how will be used? I think that in the cash -- there are other possibilities, other investments in the different businesses. But our main focus will be on using that $1.5 billion plus cash on hand. And certainly, any dividends we get next year in the future from the MI subsidiaries to pay off the 2021 debt and retire the AXA liability in 2022.

Very helpful. Thanks so much.

All right, very welcome. Sean. Thanks for the questions.

We'll go next to Manuel Garcia with Anchorage.

Hi guys, a couple of questions, one for the Hony Capital, I think in the past, one of the reasons you describe the holdup was that Hony itself isn't providing the $1.8 billion, there were going to get a bunch of LPs behind them to provide it. Has that now been received? Do they have all that capital, all the funding for the $1.8 billion already approved and it's just a matter of getting the regulatory approval?

Manuel. Thanks for the question. Yes, I would say I think we're in very good shape on the $1.8 billion. I think the Hony and the partners have been arranged pretty much and the 35% of the funding comes from Mainland China, so I think that's a good shape. Obviously, we are dependent on the actual funding of those together, the $2.7 billion on the approval of NDRC and then the SAFE authorization, the window how that conversion process works. We do think that, I mean, obviously, I don't want to get ahead of the Chinese regulators, it's their decision to make, but from the beginning, based on a number of conversations that I've had with the -- Chairman LU was very close to all of them. We do believe that they continue to support the deal. So, it would be November 5 today so in the next three weeks or so, we hope those approvals come in from NDRC and SAFE and then the money would be wired out of Mainland China and then Hony Capital would transfer its $1.8 billion and then we'd be able to close the deal by the end of November, that's the plan.

Yes, no, no. I don't think the concern has been the regulator, I guess the concern has really been does Hony have the $1.8 billion. I guess the answer is, it does. The answer is, yes?

I think based --

Or not yet?

Based on everything we have heard, we think the Hony Capital $1.8 billion is in good shape.

It's in good shape, okay. Okay, thank you for that. Second question I had is, for the $1.5 billion of new capital and the three subsequent tranches. Is that money already financed and locked in? Or is there going to be a process next year of getting that capital approved? What's the new updated source of that $1.5 billion? Any uncertainty of it actually coming into the entity post deal closing?

Again, going back all the way to the beginning of the deal, a significant reason that the Genworth regulators are supportive of the deal is because of that $1.5 billion. So it's a big part of the transaction and I think all of the regulators of Genworth and Genworth itself have done their due diligence on the $1.5 billion. And so on that, Oceanwide can rely on their total businesses around the world and capital. And so, again based on the conversations we've had and documentation on the $1.5 billion, we and the regulators are comfortable that those $500 million tranches will come in as scheduled.

Okay and then sorry, my final question was you had some commentary on the USMI business, I think you talked about losing some market share though, obviously still be in a pretty solid mortgage share. You talked about being a little more conservative. Did you see pricing weaken this last quarter? What made you take a more conservative approach than your competitors?

Yes, Manuel I would say, I think I'll be a little careful when you look at quarter-to-quarter market share because that's going to be based on a lot of different things, but I'll ask Kevin Snyder, who is our Chief Operating Officer to give you a more precise answer in terms of -- we think the NIW was very strong in the quarter, but I think Kevin can give you a little bit more details on how the business saw the opportunities and what we did from a new business perspective. So, Kevin, over to you.

Thanks, Tom. I -- our market share is continually is impacted by the execution of our go-to-market strategy and that's including, but not limited, to our price competitiveness relative to our peers and -- particularly in the last year in our selective participation in some forward commitment transactions. We do estimate that our share is down from the prior quarter. As Tom mentioned, we regularly -- market share moves around, we gain some, we lose some with the customer level on a quarter-to-quarter basis. But I guess what I would tell you is we pulled back in some price sensitive areas of the market. We didn't do quite as much of the forward commitment business. Managing our new business volumes is like managing a portfolio. We're always trying to manage the risk and the reward return trade off associated with it. And with the extensive volume that was available in the market this time, we chose to trim back some of that and think our share's down a little bit. We feel very good about our share level and the level it will still come in at. And we think we are poised to continue to drive strong share and perhaps additional share progression going forward. This is a competitive market and it's always going to be competitive and we react to that with an eye on maintain the returns we're trying to achieve for our business.

Just in terms of that point and I fully agree I think maintaining market share in a bad environment is not a good idea as I think that's totally valid, but did you see pricing weaken, like if you look on a like-for-like basis, is that what made you pull back and say you program business that you just highlighted? Was it -- you think -- are there increasing risk that you see that make you more concerned? Just trying to get a sense of that point. It's not a criticism of the lower market share, it's more just try to understand what did you see that made you want to pull back a bit as you said.

No, we had a very strong market share in Q2. And there was -- I would say there was some enhanced pricing competition in the Q3, but nothing really out of whack. We remain cautious on this environment and what's going to happen and play out with COVID overall. We think the credit quality of the business, we've been writing has been very strong. And when you compare it to the last big downcycle, it's just a much smaller -- stronger business volume. So, maybe a little bit of competition, but just all of the days of business in the US Mortgage Insurance business.

The only thing I would Manuel if I look at our operating plan for 2020, I can tell you that we did not expect we'd be writing new NIW more than $25 billion in any of our quarters this year. So we -- if you go back to the second quarter, it was over $28 billion and this quarter over $26 billion. So, it's always hard to know what other competitors are doing, but from my perspective and looking at the goals of USMI, I think they're well above their expectations this year in terms of NIW being written. And I think it's good execution I think by the team and as I say, you know, they -- again we're very disappointed with the ratings. We think the ratings for USMI are wrong and we do think that the rating because we are lower than our competitors, even though we operate as well or better than the competitors, we think that has some issue. Despite all of that, I'm extremely pleased with how well Kevin, Rohit Gupta, the people running USMI have done. So, we're very pleased with the level and NIW and as Kevin mentioned the most important thing is we continue to price new business in the mid-teens. And so, if you look at a 70 basis point risk free rate, pricing that amount to do business over $25 billion in the last two quarters of NIW in the mid-teens, I think adds a lot of value to the USMI and ultimately to Genworth.

Yes. All right, thank you guys very much

We'll go next to Geoffrey Dunn with Dowling & Partners.

Thanks, good morning. I just wanted to follow up on that in my line of questioning. Is your sense -- with the market share decline sequentially, is that primarily due to the loss forward commitment contract? Or are you pulling back in other aspects of the traditional flow market?

I would say…

I was going to say, yes, thanks for the question, I have to turn it to Kevin to answer the questions on USMI.

I would say, as I mentioned, we were a little bit more selective in our participation of that business. It was conscious. And it's not necessary that we lost anything, Geoff. But if that is probably the most price-sensitive channel in the market. And so we, it, it was at that level and not really pressure from the rest of the market space.

Okay. And then I think the general consensus back in the second quarter was, on average pricing was up 10%, 20% from pre-COVID. Do you think that still is generally the case?

I think overall that was probably -- that's probably in the ballpark. We -- it's probably backed off a little bit, but Geoff it's still about it's still above the level that we -- as we entered into this period. And it's starting to reflect some of the performance we're seeing as the forbearance trends come down and as delinquency start to decline and as, and as the cures are doing a good job against the new delinquencies. So, we see overall a pretty good environment and it's on a good trend. So, I think we're still up compared to where we started, maybe not the full 20%, but backed off a little bit.

Okay, and then last question. If Biden ends up winning and pushing through that shift in corporate tax rates, the industry passed on all the tax savings back in the spring of '18, what is your sense in terms of pricing power and actually need to increased pricing in that scenario to maintain returns?

Yes we are -- if our returns are impacted negatively from a subsequent change in the tax approach under a Biden presidency, I think we're pricing the cost -- our cost, and we'd have to respond and to maintain existing returns to our customers. So, I think it would -- we took advantage of when the tax rate went down. We passed that along to the customers, and we may have to push some of that back if taxes go up.

Okay, thank you.

We'll go next to Howard Amster with Amster Trading.

Congratulations on a great quarter, Tom. I did want to ask you a question on AXA, where you might get some money back from some of the banks that sold the insurance? And I'm wondering how that's going? What's the time line on that? And the second question is, can you just go over, again, the increases that you're proposing for the long-term care?

Sure. Thanks, Howard, for both of those questions. Good morning. So on AXA, we made the settlement. As part of the settlement, there are still some invoices coming in from AXA, and we gave the market a view that we thought that would be a little over GBP100 million of new -- the invoices that we're in, but that will sort of be passed through. And I think that's all proceeding pretty much as we expected. As I have said on a number of previous calls and as you know, Howard, I spent 11 years in Europe. So I'm very familiar with all of these insurance and banking cases in terms of the misselling. And the precedent is that in almost all cases in the end, the banking partner -- because they developed the selling and insurers did not, the banking partners were held responsible. And so my view is that's still the case. The bank here is Banco Santander. And I would think going forward, we ultimately -- AXA would ultimately be successful in pursuing recoveries. And as we said, as part of our agreement with AXA, we would share to the extent we've made payments in that. So that all has to go through a process and that's really more AXA's decision than ours. But again, the precedent would say that at some point in the future, we would get recovery. On the LTC side, we went through the numbers, $595 million of premiums, approval average of 29%. I mean that's $173 million. In a net present value basis, our cumulative is now 13.5% [ph] a day. I will tell you, we have several large states in our LTC premium approval queue, if you will, where we anticipate that we will receive good increases. And because they're big…

Thank you very much.

Welcome Howard, thanks.

Ladies and gentlemen, we have time for one final question coming from Charles Sweat with Balyasny.

Thanks. Sorry, I was on mute. Wanted to follow up on the financing question for the Oceanwide transaction. And Oceanwide has a pretty complicated corporate structure. And one thing I just wanted to clarify since the documents that they provided regarding the financing aren't available, is that there appears to be some real estate projects in the United States where Hony Capital is buying assets from Oceanwide. I just want to make sure that the financing for the Genworth transaction isn't subject to those real estate transactions closing because the numbers that we're talking about are pretty similar.

So Charles, great question. The Hony Capital funds that are looking at the San Francisco property and then the funds for our deal are totally separate funds of Hony Capital. And the transaction, it's sort of a bridge loan to Oceanwide, two years provided by the Hony Capital Mezzanine Fund LP, which is a -- it's a listed fund. And then for the San Francisco property, the -- there is a Hony Capital real estate fund that is the counterparty in that transaction. So, both Hony Capital is a general partner and limited partners, these are different funds with different priorities. One is real estate fund and the other is a mezzanine debt fund.

Great, thanks.

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

Thank you very much, Jennifer. And I also want to thank everybody for joining the call. I also want to thank the questions. I think all of you asked very good questions, and I know a lot of investors are interested in. So thank you for that. That gave us a chance to, I think, give a little bit more perspective on those. I do want to reiterate that we're very pleased with the progress that Oceanwide is making since the update previous to the one we did on Monday. They've made great strides in finalizing the financing with Hony Capital as well as from Mainland China. And I think they've -- they're in good shape in all the -- updating all the necessary filings. Obviously, they're waiting for the final approval or re-approval from NDRC and then the SAFE actions. But we're hopeful that based on everything we know and the documentation we've received that we can close the transaction by the end of November. We still think it's the best value for our shareholders, and we are hopeful that we'll be able to close without an additional extension. In the meantime, we're running the Company, focusing our strategic priorities, including the debt financing that we did. The $750 million [ph] at the USMI holding company level, we're full speed ahead on the IPO. And I think if you look at the USMI results, I think they were fantastic in the quarter. Australia had a good quarter, and we have the ongoing challenges in the life insurance business because we had a lot of business that was written 20 years ago that's coming through with the end of a level term and the lapse rates are higher than the assumptions made 20 years ago. And so that has an impact on that. That's a non-cash charge. And we expect -- and Dan gave you a little bit of perspective on that. But despite that, overall, for that -- the division, the US life division, which includes LTC and fixed annuities, I think at $59 million and $24 million respectively, it was a good quarter. So I think, particularly, as you put it at and I'd say particularly USMI in the context of we're still challenged as a country and I guess, as a global economy with COVID-19. So when I look at the third quarter, the $418 million net income and the $132 million of adjusted operating income, I think it's just a very strong quarter, and that bodes well, obviously. I think China Oceanwide and Chairman is encouraged by the quarterly results. And so hopefully that will continue. Obviously, COVID-19 is still a significant issue, and we'll see how that plays out. The cases are going up. So, it's something obviously to be focused on. Again, thanks to everybody for your interest and your support of Genworth as shareholders. And with that, I'll turn the call back over to Jennifer.

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