Genworth Financial Inc

Good morning, ladies and gentlemen, and welcome to Genworth Financial's second quarter 2020 earnings call. My name is Greg, and I'll 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 the 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 the 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, Greg. Good morning, and thank you for joining Genworth's second quarter 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 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 Sheen, 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 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 our results of our Australia business, please note that all percentage changes exclude the impact of board 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, Tim, and good morning, everyone. I wanted to start my prepared remarks today by acknowledging the leadership announcement we made earlier this week. First, I would like to thank Kelly Groh for her many contributions to Genworth and our predecessor companies over the course of her 24-year career. General Porter and I believe Kelly has done an excellent job as CFO since assuming the role in October 2015. He has been an invaluable partner to me as we navigated Genworth's challenges, particularly the many regulatory hurdles we faced to receive all required Genworth regulatory approvals for the China Oceanwide Transactions. Well, I understand that investors and outside observers sometimes view senior management changes with skepticism. In this case, the real story is exactly what we said in the press release on Tuesday. COVID-19 pandemic has changed how we view our professional and personal lives forever. In Kelly's case, as she will know later in her remarks, having aging parents and family thousands of miles away on the West Coast led her to decide to make a change in a professional and personal situation. She and I agree that our stepping down as CFO of Genworth after the end of the second quarter, when the financial reporting requirements were completed, was the right time for her and for Genworth. We appreciate that Kelly has agreed to remain available for a period of time to help Dan Sheehan as he transitions into his new responsibilities. Dan and Kelly have worked closely together at Genworth and GE Capital for 22 years. Dan has been an outstanding performer, and he assumed the role of Genworth's Chief Investment Officer in April 2012. Over my 40-year career in the insurance industry, starting at Aetna, I've observed that putting the investment operations under the CFO can be very effective. It brings both sides of the balance sheet together under a single financial executive and point of view. This allows for very effective asset liability management, which will be crucial as all insurance companies navigate a sustained period of very low interest rates. While we had other strong internal candidates to succeed Kelly, the board and I believe Dan is the best choice to assume the CFO role. Dan has several strong lieutenants in the General Investment Group, and they will now step up and assume additional responsibilities. Before they support Dan in his new role, Jerome Upton, CFO of Global Mortgage Insurance and interim CFO of U.S. Life Insurance, will be promoted to a newly created position of Deputy CFO of reporting to Dan. A significant part of Kelly's finance, accounting, and actuarial teams will report to Jerome. Dan and Jerome have worked together at Genworth for over 20 years. We are very fortunate to have them both assume higher executive and financial responsibilities at this critical time for Genworth. With input and advice from Kelly during the transition, Dan and Jerome will further develop how they and their teams work together in the future. I expect that Dan will have a more external focus including helping us oversee the debt and equity transactions we are considering, and Jerome will oversee the day-to-day activities of finance, accounting, and actuarial functions. Dan has also worked very closely with me throughout the China Oceanwide transaction process, and he is very well regarded by Chairman Liu and China Oceanwide's executive team. As part of our leadership transaction announcement, I'm also pleased to announce that Brian Henegas will be appointed Executive Vice President and Chief Risk Officer of Genworth, effective September 8, 2020. Brian started his insurance career at Unum, then Unum Mutual, in 1982, and has since had several leadership roles with pricing, risk, operational, and actuarial responsibilities at large global insurance companies. This includes at Aetna 9G, where we worked together closely for many years. He most recently served as Senior Vice President and Head of U.S. Pricing and Product Management at MassMutual, where he spent nine years in senior roles. He is an experienced fellow of the Society of Actuaries with significant experience in investments, fixed income products, life annuity, and long-term care. He will assume the CRO responsibilities from Kelly, who has been interim CRO since January of 2020. Now turning to the China Oceanwide Transactions. Please note that, unfortunately, we do not have an Oceanwide representative on today's call. While we were not able to arrange for a speaker on today's call, we will still provide an update based on our knowledge of the latest update with respect to the funding plan. We are working very closely with Oceanwide to understand the process and timing for specifically identifying their sources of funding to complete the transaction. We continue to believe that the Oceanwide transaction is the best strategic option for GenWeb. And based on feedback we have received from investors, we believe that closing the Oceanwide transaction continues to have strong support from Gen West shareholders. We have made it clear to Oceanwide that meeting the funding milestone set out in the 15th waiver of the merger agreement is critical to Gen West, our shareholders, and other stakeholders. To remind investors, we are seeking satisfactory evidence by August 31st that $1 billion of funding for the transaction from within mainland China is available in a specified account. In addition, we also requested satisfactory evidence by that date that China Oceanwide has been able to secure an additional $1 billion or more from Honi Capital and or potential third-party investors. We have received many questions regarding the delay in Oceanwide's ability to certify they have secured these funds. We believe the $1 billion from mainland China is available to fund the transaction. We also believe the $1.8 billion of funding from Honi Capital was secured prior to the COVID-19 pandemic. Since the original HONI funding commitment was secured in 2018, the HONI commitment was extended each time Genworth and Oceanwide had to extend the merger agreement because of regulatory delays. It was only after the COVID-19 pandemic disrupted global capital and financial markets in February and early March that the HONI capital $1.8 billion commitment became an issue. Oceanwide and Genworth are in close contact regarding progress on the funding from Hone Capital or other potential third parties, and we will provide updates on the progress in due course. In the interim, Genworth is working on steps to address our near-term financial obligations, which include liabilities arising from the recently announced settlement with AXA, as well as approximately a billion of debt maturing in 2021. As previously outlined, These steps include executing a potential debt financing in the near term and preparing to launch a potential 19.9% initial public offering of our U.S. mortgage insurance business subject to market conditions if the China Oceanwide transaction is further delayed or terminated. We are keeping Oceanwide informed at every step of the way regarding any potential steps we may take. Oceanwide has been very supportive of General's plans throughout these conversations. Next, I would like to cover in more detail our recently announced settlement with AXA related to liability for payment protection insurance, or PPI, in selling losses. Reaching this settlement with AXA has removed uncertainty around our near-term cash needs and has deferred the majority of our obligation to AXA to 2022 due to certain prepayment events. Under the terms of the settlement, someone paid AXA $125 million on July 21st which was in addition to the approximately 134 million US dollars interim cash payment we made to AXA in January. We also issued the secured promissory note to AXA, pursuant to which Genworth agreed to make deferred cash payments, filling approximately 317 million pounds in two installments, again, subject to certain prepayment events. The note was secured by pledging 19.9% of the outstanding shares in Genworth Mortgage Insurance Australia and 19.9% of the outstanding shares in Genworth Mortgage Holdings. These pledges will terminate upon the payment in full of all the obligations by the due dates. Genworth will also pay a significant portion of all future mis-selling losses incurred by AXA, currently estimated to be an obligation of approximately £107 million. These losses relate to PPI mis-selling complaints previously received but not yet processed by AXA and will be added to the second of the two deferred installments. Dunworth will also pay AXA quarterly interest on the deferred amounts. In connection with the settlement, Dunworth incurred an after-tax loss of $516 million as part of discontinued operations in the second quarter of 2020. Kelly will go into more detail on this in her prepared remarks. Under the terms of the sale and purchase agreement pursuant to which businesses were sold to AXA, as well as the settlement, in the event that AXA recovers amounts from third parties related to mis-selling losses, including from the distributor responsible for the sale of the policies, bandwidth has certain rights to share in those recoveries to recoup payments for the underlying mis-selling losses. There are numerous examples of distributors and banks paying for PPI mis-selling complaints. I believe that is where the ultimate responsibility should lie, as it was the banks and distributors that sold the products, made the vast majority of the profit from the sales, and it is their actions that are subject to the mis-selling complaints. While we have received many questions about the details and process for those potential recoveries, we cannot comment on this any further. The resolution of this litigation removes significant uncertainty as we now know the timing and amounts of our obligations to AXA and can therefore focus our attention on the actions we need to take to enhance our near-term liquidity position. Now I would like to turn to our financial performance in the quarter, including COVID-19's impact on Genworth. Before turning the call over to Kelly to provide more details. Our priority during this pandemic continues to be protecting the health and well-being of our people. Genwa successfully transitioned to a full remote work environment in March, and I'm very proud of how our employees have adapted to this new environment. The majority of employees are still working from home, and we are continuing to serve the customers with a level of excellence they expect from Genwa. As cases have continued to surge in some regions of the U.S., and given the organization's seamless transition to remote operations, we have made the decision to extend remote working conditions until at least January 1st, 2021. We are constantly monitoring and evaluating the impact of COVID-19, and we will continue to act in the best interest of our employees and their families while effectively addressing customer needs. The pandemic impacted our second quarter financial results primarily as a result of several macroeconomic factors, including higher unemployment, government stimulus, equity market improvement, and higher mortality. The global mortgage insurance businesses were adversely impacted by higher mortgage delinquencies as a result of higher unemployment and increased mortgage forbearance rates. USMI reported an adjusted operating loss of $3 million, primarily driven by higher delinquencies. USMI achieved $28 billion in new insurance written during the quarter, up 80% versus the prior year, driven by higher refinance originations due to lower interest rates, a larger private mortgage insurance market, and higher estimated market share. At the end of the quarter, USMI's PMIR sufficiency ratio was very strong at 143%, in excess of $1.2 billion above requirements. While we are pleased with the current level of capital in USMI, we do expect our PMIR sufficiency to decrease over time as delinquencies increase. Our Australia and my business reported adjusted operating income of $1 million, U.S. dollars, down significantly and versus the prior year due to losses in the second quarter, down sequentially and versus the prior year due to higher losses in the second quarter. Capital levels remain strong with approximately $275 million Australian dollars above management targets. Due to elevated delinquencies and the resulting increase in capital requirements, We do not expect to receive further dividends from our MI businesses in 2020, as they prioritize capital preservation during this period of uncertainty, and to comply with new regulatory guidelines from the GFCs, who have implemented temporary PMIR requirements that require approval of certain capital-related transactions. This underscores the importance of the steps we are taking to raise capital to meet January's upcoming cash needs. Turning to U.S. life insurance, The segment delivered an adjusted operating loss of $5 million, driven by lower life insurance performance, partially offset by higher performance in the long-term care insurance business due to higher mortality, attributable in part to the COVID-19 pandemic. Going forward, we will continue to manage the U.S. life insurance businesses on a standalone basis with no plans to infuse or extract capital other than as committed in connection with completion of the ocean-wide transactions. We are closely monitoring macroeconomic indicators and conducting extensive scenario planning exercises to model the potential financial outcomes of different economic scenarios. While the severity and duration of the pandemic and related economic repercussions remain uncertain, Benworth is taking steps to maintain sufficient capital levels to ensure that our mortgage insurance companies can withstand a wide range of economic scenarios while also addressing our upcoming holding company financial obligations. In summary, we are focused on closing the OceanLine transaction as soon as possible, while protecting shareholder value through the execution of prudent liquidity-raising actions. We will continue to communicate as frequently as possible to keep you informed of our progress against those actions. And now I will turn the call over to Kelley.