Genworth Financial Inc (GNW) 2014 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Genworth Financial's fourth-quarter 2014 earnings conference call. My name is Christy, and I will be your coordinator today.

(Operator Instructions)

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.

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 notes 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 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 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 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.

Now, I'll turn the call over to our CEO, Tom McInerney.

Thank you, Amy, and good morning, everyone. Our objectives for this call are to update you on fourth-quarter 2014 results, provide a summary of the LTC ALR margin review and resulting outcome, and update you on steps taken as part of our strategic review process commenced over the last quarter as we explore options to maximize long-term stakeholder value. And in doing so, address questions that some of you have raised since our last call.

It is important to note upfront that we are conducting a thorough review of a broad range of strategic options with the help of external financial and strategic advisors. In order to maintain flexibility with respect to our strategic options for all key stakeholders, we believe we need to pay down $1 billion to $2 billion of debt over time.

As you can imagine, there are benefits, challenges and trade-offs associated with each option, such as debt levels and terms, tax considerations, and the views of regulators and rating agencies. That said, we intend to continue to work through these issues, and take the steps necessary to properly evaluate and implement the options that will best support our long-term strategic priorities.

We've also made decisions that resulted in certain charges in the fourth quarter that we felt were instrumental in moving forward to return the Company to profitable growth as quickly as possible. The LTC margin is positive in the aggregate, but as we indicated might be the case in our past disclosures, the margin turned negative on the acquired LTC business, which resulted in an after-tax, non-cash GAAP charge of $478 million. We also incurred a moderate 2014 statutory reserve charge in our New York subsidiary, reflective of higher claim severity and lower interest rates.

Further, we also recorded net non-cash charges related to the Company's progress on plans to monetize the lifestyle protection insurance business, which we had previously identified as non-core. Marty will take you through this, along with several other actions, in more detail in a few minutes.

We are also launching a very significant restructuring plan, focused on supplier and cost rationalization, which we expect will generate in excess of $100 million in annual cash savings by the end of 2016. Moreover, capital and liquidity remain strong across all platforms and at the Holding Company. I also wanted to note that these charges overshadowed another solid quarter for the global mortgage insurance and fixed annuity businesses.

There are a few important takeaways for our mortgage businesses. First, the mortgage insurance business continued to show progress from our turn-around efforts, which we laid out 18 months ago, benefiting from strong competitive positions, stable to improving markets, and favorable loss ratio performance across all three primary platforms. Additionally, Canada and Australia remain strong cash generators, and have been and are expected to continue to be reliable sources for future dividends to the Holding Company.

Second, our USMI platform continued to show improved operating performance, benefiting from a 19% drop in new flow delinquencies as compared to a year ago, reflecting the burn-through of the older books as the new books now represent 56% of risk in force. While this business has come a long way, we believe it will take a few more years to be a significant cash dividend contributor.

Third, the USMI business made significant progress during the quarter, working with reinsurers toward our plan compliance with the new GSE capital requirements by the anticipated effective date. Lastly, we had a settlement in our European mortgage insurance business which significantly reduced risk in force in Ireland with minimal earnings impact. In summary, the global mortgage insurance business is executing well, and we expect it to continue to be a strong driver of operating performance going forward.

Now let me turn to the life division. The underlying fixed annuities performance was good; and absent the reserve charge, life insurance showed modest improvement.

LTC remains a significant challenge. We believe the updated assumptions for the DLR and ALR are reasonable and appropriate, given the experience that has emerged, and the reviews undertaken. We will continue to monitor experience, assumptions, and the resulting reserves closely, with support from outside actuarial advisors.

We have made significant progress to date to re-rate the most problematic LTC blocks acquired or written over a decade ago. However, we expect to continue to feel pressure as these blocks reach their peak loss years, as our policyholders age and, therefore, we will be pursuing additional in-force rate actions to recognize changes in experience. We are encouraged, however, with the positive margins on the remaining blocks, and we'll actively monitor and address unfavorable experience as it evolves.

On the rate action front, we have made good progress to date in our 2012 rate actions; and based on current approvals and anticipated first-quarter approvals, we now project approximately $240 million to $260 million of additional annual premiums against our $250 million to $300 million objective.

Now I will turn the call over to Marty to go into more detail on the fourth-quarter results, and the outcome of the active life margin review.

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 performance in several of our businesses, particularly in our global mortgage insurance division. These items include after-tax charges of $478 million from long-term care blocks acquired over 20 years ago as a result of our annual review of active life margins, and unfavorable reserve adjustments totaling $48 million in our life and long-term care businesses.

In addition, reflecting our consideration of a variety of potential strategic options and current business realities, we recognized the following items in net income. First, we wrote off all remaining goodwill in both our life and long-term care businesses, resulting in an after-tax charge of $274 million. Goodwill balances are highly dependent upon projected future sales levels; and with our assessment of current market realities, in addition to our active consideration of potential business portfolio changes, projected sales levels could drop in some scenarios. We concluded it was appropriate to write off the associated goodwill balances.

Second, we recognized a tax charge of $174 million, reflecting the change in our intent to permanently reinvest earnings from Genworth Mortgage Insurance Australia Limited. While we have not made any decision with regard to this asset, we are evaluating it among several other available strategic options, given its valuation and liquid state.

Also, we are progressing on the sales process of the lifestyle protection insurance business, which has been a non-core business for us. Related to that planned sale, we completed an internal debt restructuring, resulting in a $108-million tax benefit. While I won't, of course, address valuation directly, we are seeing market interest for this business, and are seeking to monetize it. Given current book value, we anticipate a significant loss on sale.

Global mortgage insurance had another good quarter, as shown on slide 4, reporting net operating income of $83 million, down slightly versus the prior quarter and prior year when adding back the non-controlling interest impact of the Australia IPO in those periods.

Let's cover Canada on slide 5 first, where operating earnings were $36 million for the quarter, down $10 million from the prior quarter. We saw lower unemployment and a modest sequential increase in home prices. Additionally, tax benefits were lower versus the prior quarter.

The loss ratio increased 5 points from the prior quarter to 26% from seasonally higher new delinquencies, net of cures. The full-year loss ratio was 20%, at the midpoint of our 2014 expectation. We expect the 2015 full-year loss ratio to be between 20% and 30%.

Turning to Australia on slide 6, operating earnings were $33 million, down $15 million versus the prior quarter, primarily from less favorable tax benefits. Macroeconomic conditions were generally stable in the quarter, as there was a slight decrease in the unemployment rate, and overall home prices experienced modest gains. The loss ratio remained very low at 15%. The full-year loss ratio was 19%, slightly better than the low end of our 2014 expectation. We expect the 2015 full-year loss ratio to be between 25% and 30%.

In other countries, we executed a lender settlement, materially reducing risk in force in Ireland from $700 million to $60 million, with only a minimal financial impact in the quarter. Given the size of our international operations, foreign exchange rates do impact our earnings. While I can't predict where these rates will go, I can give you some perspective on sensitivities.

For instance, if total-year 2014 exchange rates were at current levels, our international earnings would have been approximately $30 million lower. Using this example, a rough rule of thumb would be a 1-point move in either the Canada or Australian exchange rate would result in approximately a $2-million change in earnings.

I will stress that this is only a translation risk, as our assets and liabilities in our international businesses are predominantly held in their respective local currency. However, we do hedge much of our foreign exchange risk associated with expected cash flows.

Moving to slide 7, in USMI, net operating income was $21 million for the quarter, up $23 million from the prior quarter. As a reminder, the prior quarter included $34 million of after-tax accruals recorded in connection with settlements, one with Bank of America, which has now received GSE approval, and another, which has now been resolved.

The reported loss ratio for the year was 62%, including a 9-point unfavorable impact from third-quarter lender settlements. For 2014, USMI net operating income of $91 million was significantly improved over 2013. Earnings and loss performance should continue to improve, with the 2015 full-year loss ratio expected to be between 40% and 50%.

NIW was seasonally down from the prior quarter, but benefited as the business increased its single premium lender paid new insurance written, reflecting its selective participation in this market. Future volumes of this product will vary depending on the evaluation of the risk return profile of these transactions.

The Company's estimate of USMI market share increased year over year to 15%. At year end, 56% of the risk in force is composed of 2009 and forward books of business. We anticipate this percentage will grow to between 60% and 70% by the end of 2015.

Turning to capital and the GMI division on slide 8, the prescribed capital amount, or PCA ratio, in Australia is estimated at 159%, up from the prior quarter from continued strong statutory income. For Canada, the minimum capital test, or MCT ratio, is estimated at 225%, in line with the prior quarter.

USMI at quarter end, the risk-to-capital ratio for GMICO was approximately 14.2 to 1, down from 14.8 to 1 in the prior quarter, from an increase of $125 million in admitted deferred tax assets in GMICO, partially offset by changes in value of affiliated investments and increased risk in force.

Our capital goals in the global MI division for 2015 include: a PCA ratio of 132% to 144% in Australia; 220% or greater MCT in Canada; international MI dividends of $150 million to $230 million; and combined risk-to-capital ratio of less than 18 to 1 in USMI. I would also note that Australia has declared a special dividend, our portion of which is approximately $40 million, and will be received in the first quarter of 2015.

We have two strategic priorities for GMI in 2015. First, in Australia and Canada, we will continue to look for ways to optimize capital to improve ROE, provide for growth opportunities, and return capital to their respective shareholders.

Second, in USMI, it remains our priority to plan to comply with the new GSE eligibility requirements by the effective date. We still estimate the capital need to be between $500 million and $700 million. We continue to make progress on reinsurance transactions when the market appetite remains robust. However, we are waiting on finalization of PMIERs capital credit standards, and ultimate reinsurance terms are subject to modification.

Turning to the US life insurance division, as shown on slide 9, the operating loss was $482 million, reflecting the impact of the long-term care annual loss recognition review, with a net loss of $750 million after the goodwill charges mentioned earlier. Favorable mortality in life insurance was more than offset by a reserve correction on a term-life reinsurance treaty in the current quarter. Fixed annuities showed continued solid performance.

The long-term care insurance net operating loss in the quarter was $506 million, driven primarily by the completion of the annual loss recognition testing review and associated charges on the acquired blocks of business, as shown on slide 10. I'll provide greater detail on the review in just a few minutes.

Although incurred loss results were primarily impacted by the loss recognition charge on the acquired blocks and other adjustments, the claim reserve review from last quarter also had an impact, as we set up higher claim reserves than new claims in the fourth quarter using the updated reserve assumptions, and also had lower reserve releases on existing claims. In addition, we had unfavorable adjustments to our claim reserves of $16 million, including a $44-million claim reserve correction. This correction was identified in the fourth quarter as an operational process control deficiency in how we implemented one of the claim reserve assumption updates.

We are currently assessing the internal control environment around this issue as part of the year-end controls assessment to determine whether we have a significant deficiency or a material weakness. While we've not yet completed this assessment, we believe this deficiency likely constitute a material weakness in our internal controls, and we plan to complete our review process and reflect the results in our 10-K, as well as our plans for remediation, if we do end up concluding on such a weakness. We are highly focused on addressing this issue, and taking the appropriate actions to fix the issues.

Moving to slide 11, in-force rate actions continue to favorably impact earnings, benefiting results by $41 million, $7 million higher than the last year, but $3 million lower than the prior quarter. We also received additional approvals from a second round of filings from the 2012 in-force rate action that increased the incremental premium approved to $200 million to $210 million, with another $40 million to $50 million expected in the first-quarter 2015, against the total anticipated annual premium increase of $250 million to $300 million when fully implemented.

Moving to slide 12, operating earnings in life insurance were $1 million for the quarter, down from $13 million in the prior quarter, and include the reserve correction on a reinsurance treaty of $32 million that I mentioned earlier. Mortality experience is favorable versus the prior quarter, and unfavorable versus the prior year.

For fixed annuities, on slide 13, earnings were $23 million, slightly lower than the prior quarter.

Turning to US life statutory performance on slide 14, unassigned surplus decreased approximately $135 million, and the RBC ratio decreased 18 points to approximately 430% in the quarter. There were several drivers of this decline. First, as a result of our annual statutory cash flow testing review, we increased reserves by $39 million in our New York subsidiary to reflect an incremental $195-million negative margin on its long-term care insurance business, with the remaining $156 million to be recognized over the next four years. I'll provide more details on the review in a few minutes.

Second, we increased reserves related to secondary guarantee UL products in our New York subsidiary, which is the second and final increase related to our discussions with the New York regulator on this matter. Third, we reinsured a block of term universal life to a third-party reinsurer, providing approximately $80 million of unassigned surplus benefit. And finally, the completion of an internal debt restructuring in the lifestyle protection insurance business, which provided overall tax benefits of $108 million on a GAAP basis, also resulted in changes to certain inter-company tax balances in US life and in the Bermuda entities.

The US life companies experienced a charge of $155 million, while BLAIC saw a tax benefit of $230 million. With the reflection of this benefit and other timing, BLAIC ended the quarter with an RBC ratio of approximately 345%, up from 245% in the prior quarter. We expect the RBC ratio in our US life companies to be greater than 400% at year-end 2015; and repatriation of the long-term care business from BLAIC to the US life companies remains a strategic priority for 2015.

Shifting to slide 15, and the corporate and other division, the net operating loss for the quarter was $17 million. International protection reported a loss of $4 million in the current quarter; that included approximately $4 million of unfavorable items, including higher claim reserves in certain contracts, an unfavorable shift in the mix of contracts with profit share, higher expenses, and unfavorable foreign exchange.

Run-off earnings were higher by $11 million compared to the prior quarter, primarily related to favorable taxes. We had favorable taxes in corporate and other related to timing, with the full-year operating tax rate of 34%.

Moving to investments on slide 16, our general account continues to perform well. The global portfolio core yield was down slightly from the prior quarter at 4.38% due to the impact of lower rates and other factors, and there were no impairments in the quarter.

As shown on slide 17, at the Holding Company, we continued to maintain significant liquidity, with cash and liquid assets of approximately $1.1 billion, representing a buffer of approximately $685 million in excess of our target of 1.5 times debt service, and well above our $350-million risk buffer. We anticipate maintaining this target and risk buffer in 2015. Unfortunately, our leverage ratio increased to 25.9%, given the long-term care reserve increases, goodwill write-downs, and other impacts to equity this quarter.

Stepping back, in addition to our current excess liquidity at the Holding Company and the solid capital levels across our operating platforms, we have significant levers benefiting our financial flexibility. These include monetization of our non-core businesses, additional life block sales or refinancings, and reinsurance of MI business risks. We also have other sources of capital available that we could consider, such as the additional sell-down of Australia MI business, among others. We currently believe these are more attractive sources of capital than outright equity raise, and we have no current plans to do such a raise at this time.

Let me now turn to long-term care, and discuss our annual margin testing. Please refer to the separate presentation of long-term care annual margin testing. In the third quarter, we made significant updates to our long-term care claim reserves to reflect our updated view on our claim severity assumptions. After a review of this experience, expected claim termination rates are expected to be lower, and benefit utilization rates are expected to be higher than had been assumed before the third quarter.

As a result of the updated assumptions, we expect claimants are staying on claim longer, and using more of their available benefits. We made these updates to our claim reserve assumptions in the third quarter, and they have informed the assumptions made in our margin analysis. With these updated claim severity assumptions, we have and will continue to pursue [actuarially adjusted] rate actions to attempt to offset the higher expected claims costs. These new claim cost views and associated rate actions represent the most significant updates from a margin analysis last year.

Genworth's reviews of long-term care active life margins are substantially completed. We were assisted by two leading external actuarial firms with strong long-term care experience. One firm worked closely with our actuaries on the detailed assumptions and reserve changes, and the second firm conducted an independent peer review of our assumptions and approach. Both firms concluded that the assumptions in the aggregate were reasonable, and supported by experience.

Slide 2 summarizes our active life margin conclusions. First, GAAP loss recognition testing margins were positive in aggregate; however, we must test our acquired block, representing business acquired before 1996, separately from our other business. The margin on the acquired block, which, as we previously disclosed, had very thin margins, was a negative $735 million pre-tax, as future in-force rate actions, either incremental premium rate actions or reduced benefits depending on policyholder behavior, have less impact given the higher age of the block. Net GAAP liabilities for this block had been approximately $2.6 billion before adjusting for the negative margin.

The other much larger block tested had a positive margin of $2.3 billion. Net GAAP liabilities for this block are approximately $15.7 billion.

Second, statutory cash flow testing margins were positive in aggregate, using our policies in force as of September 30, and adjusting for year-end interest rates. As a reminder, we test each legal entity separately on a statutory basis, governed by the specific rules of the regulator in the state of domicile.

The margins in our Genworth Life Insurance Company, or GLIC, and Brookfield Life & Annuity Insurance Company, or BLAIC, were a positive $4.3 billion, in aggregate, before adjusting downward for about $1.9 billion in provisions for adverse deviations, or PADs. Given the requirements for cash flow testing in New York, we increased reserves by $39 million in our New York subsidiary to reflect the $195 million incremental negative margin on the long-term care insurance business [and that entity], with the remaining $156 million to be recognized over the next four years. Recall we have had negative margins in New York in the past, for which we have previously held reserves of $80 million.

Our statutory capital levels remain solid, with an RBC ratio of approximately 430% at year end, reflecting these results. The components of the statutory and GAAP margins are laid out on slide 3. The present value of future premiums, claims and expenses are projected based on assumptions reflecting our own experience and actuarial judgment. As I mentioned, the most significant updates were to claim-related assumptions, such as claim termination rates and benefit utilization rates, informed by assumptions which were updated in our third-quarter claim reserve review, as well as the inclusion of additional assumed future premium increases and reduced benefits, which offset most of the expected increase in claims cost.

We developed a new series of anticipated in-force premium increase requests based on updated claim severity assumptions, and these premium increase assumptions were informed by our historical track record of what we have achieved in previous rate actions, in a review of the relevant regulators, as well as our third-party advisors. It is important to note that if actual claim incidence or severity in the future is different than expected, the projected in-force rate actions will change accordingly, as these projected rate actions were developed to reflect claims cost being experienced.

Other significant impacts related to investment assumptions, given the current low rate environment. As a reminder, Genworth began hedging interest rates starting in 2000 for long-term care. We have after-tax terminated hedge gains that reside in accumulated other comprehensive income on a GAAP balance sheet of approximately $1.7 billion, and this amount will amortize into GAAP income over time.

Similarly, we have approximately $830 million, primarily from after-tax hedge gains on a statutory basis, that reside in the interest maintenance reserve, or the IMR, on the statutory balance sheet, and the IMR amortizes into statutory income. While our hedging program has dampened the effect of lower interest rates, during 2014 we revised our reinvestment strategy given that environment, and adjusted our reinvestment strategy for long-term care business to pick up additional spread. This new reinvestment strategy is reflected in our cash flow testing analysis, and I'll provide additional perspectives on this revision in a few minutes.

In addition, we reviewed other assumptions, and in some cases, made updates. In particular, we reviewed claim frequency, lapse rates, morbidity and mortality improvement, and expenses. The margin impact from updates on some of these items was modestly favorable.

Slide 4 provides a summary of the key updates we made to both our assumptions concerning claim termination rates and benefit utilization rates. As a reminder from our third-quarter earnings call, claim termination rates refer to the expected rates at which claims end, and benefit utilization rates refer to how much of the available policy benefits are expected to be used.

Also, as you'll recall, there are numerous assumptions for claim termination and benefit utilization rates based on several characteristics, such as type of policy, as well as policyholder and claim characteristics. Assumptions developed in the third-quarter claim reserve review informed our active life margin analysis, and we projected them forward over the 40-year-plus projection period.

Subsequent to our third-quarter claim reserve review, we continued to assess our assumptions concerning claim termination rates in connection with our active life margin review. After review and consultation with our third-party advisors, we increased the assumptions concerning claim termination rates slightly in the later durations, given that the statistical credibility of our data from claims in duration [seven] and beyond, while much better, is still limited.

As we noted in our earnings release and commentary, we also updated our assumptions for this refined view in our disabled life reserves in the fourth quarter. The combined impact of changes to the assumptions for claim termination rates and benefit utilization rates reduced GAAP margin by approximately $5.4 billion. As we discussed in the third quarter, we have developed management actions regarding premium rate increases that we expect will offset much or possibly most of the reduction in margins from the updated assumptions.

Turning to slide 5, a key change from last year's margin testing is the inclusion of future rate actions in our GAAP loss recognition tests, as well as in our GLIC and BLAIC legal entities. Inclusion of such premium increase and associated benefit reductions is consistent with actuarial guidelines, GAAP accounting, and the regulatory framework in almost all states. In addition, we consulted with our regulators on these assumptions for our cash flow testing work.

Before discussing the future rate action assumptions, I want to give some context for our actions to date. First, we have a good history of achieving premium rate increases on our in-force blocks. In 2007, we filed for an approximate 10% rate increase, and achieved about 90% of our requested filing, that resulted in incremental premium of about $50 million to $60 million. In 2010, we filed for an approximately 18% rate action, and achieved about 94% of our requested filing, that resulted in incremental premium of about $40 million to $50 million.

Additionally, we have made good progress with the 2012 rate actions that represent about $200 million to $210 million of incremental premium when fully implemented by 2017, and have also received or expect to receive approvals in the first quarter, reflecting $40 million to $50 million of additional premium increases. We still anticipate additional premium increases from 2012 rate actions of $250 million to $300 million when fully implemented.

Second, as part of our strategy, beginning in 2013 we have filed for premium increases on our Choice 2 block. We have seen good progress to date on our Choice 2 filings, where we've heard back from 30 states, and received approval from 22 states. We believe the Choice 2 approvals received so far will add an incremental $20 million to $30 million in annual premium increases once fully implemented.

We have also received, or expect to receive, approvals in the first quarter reflecting $20 million to $30 million of Choice 2 premium increases. Also, we are going back to states that did not approve our Choice 2 filings to ask them to reconsider increases based on the new claim assumptions.

We anticipate additional premium increases of $40 million to $60 million when fully implemented from the 2013 Choice 2 rate action. These actions we have been taking just since 2007 should result in additional expected premium of about $380 million to $470 million. We have developed a plan for future premium rate increases for all older blocks up to and including PC Flex that were informed by our historical track record, reviewed with the regulators, and consistent with projected future claim costs.

These rate actions, projected to be implemented over the next 15 years, assume we achieve incremental annual premium which grows to $525 million to $625 million at the peak, before declining significantly over the subsequent years as the number of active lives declines. The corresponding GAAP margin impact of these rate actions, reflecting both additional premiums as well as reduced benefits, is approximately $4.9 billion pre-tax.

Before I move on to other assumptions in our margin analysis, let me provide some perspectives on future rate actions, and corresponding potential reductions and benefits. We believe providing alternatives to policyholders so they can choose between accepting higher premiums or electing benefit reductions in these guaranteed renewal policies is important. And we expect to see even more focus on, and receptivity of, reduced benefits as an alternative to higher premiums. We believe regulators and policyholders generally are more receptive to this approach, and certainly prefer having choices.

Such reduced benefits generally are expected to be actuarially equivalent to higher premiums, and so the margin impact should not be significantly different. However, with reduced benefits, our exposure to changes in future claims cost is lower. In other words, our tail risk is reduced.

In the low inflation world, some policyholders may find it more attractive to lower their benefit increase option, or BIO, riders on their policies in lieu of higher premiums. Choice 1 and 2, representing our largest blocks, have a higher proportion of BIO features than do older product generations. Electing reduced benefits, such as choosing a reduction in the BIO feature, may be easier for those policyholders to accept than paying higher premiums, and regulators increasingly prefer that carriers provide such choices to policyholders.

Certainly, different people have different views on the subject of rate actions, and the ability of Genworth and other long-term care providers to obtain them. We believe regulators are generally more receptive to acknowledging the need for such rate actions, and we've been working with them to gain approvals in forms that they think are more beneficial to policyholders, through approaches such as staged increases, or providing alternatives for reduced benefits. Our assumptions on future rate actions are in line with what would be actuarially justified, while reflecting our own historical track record [as we model] corresponding additional premium.

Now let's shift to slide 6 and investment assumptions. Our cash flow testing projections assume a 10-year treasury rate of approximately 2.2%, in line with levels at year end, rising to approximately 4.7% in 2028 to 2030, before gradually declining over the remaining projection period to 4% to 4.2%.

During 2014, our investment risk and asset liability management teams modified our reinvestment strategy for long-term care. In order to increase spread in a lower interest rate environment, we've made changes to our reinvestment allocations, which will lower the overall credit quality one notch to BBB+ over time.

Also, historically we have invested very little in alternative investments, but we do plan to build up an allocation of up to 5% over time. We've reflected these changes and reinvestment strategy in our cash flow testing analysis.

For GAAP loss recognition testing, we utilize the static discount rate that is in line with our current portfolio yield, as has been a practice for many years. As a result of the reserve increases in the third quarter and the fourth quarter, the assets required to back the liabilities increased, as we needed to contribute assets so that assets equals liabilities.

In this low rate environment, these additional assets were lower yielding, and decreased the PGAAP and HGAAP discount rates by 35 basis points and 23 basis points, respectively. This impact on GAAP margins of the year-end discount rates was an unfavorable $1.5 billion.

Long-term care is a long-duration product, and movements in any number of assumptions can impact performance over time. With that as the backdrop, we've provided selected sensitivities on our illustrative assumptions on slide 7, but actual experience may differ.

The claims cost sensitivity, or sensitivity A, further increases the claims severity or claim frequency above what we have included in our updated assumptions. This sensitivity does not include future rate action or benefit reductions that we would likely put in place to offset much of this impact.

Given the potential impact of interest rates on margins, we're providing two sensitivities. The first interest rate sensitivity, or sensitivity B, assumes that the 10-year treasury rates are 2.5% on a statutory basis for the entire projection period. The second interest rate sensitivity, or sensitivity C, assumes the discount rates impacting PGAAP, HGAAP and statutory cash flow testing are reduced by 25 basis points. Finally, the in-force rate action sensitivity, or sensitivity D, assumes that we only achieve 90% of the planned future rate actions that we have modeled.

Next, I will cover two GAAP accounting implications that emerged as a result of our margin testing, and are summarized on slide 8. First, given the negative margin on our acquired block, GAAP reserve assumptions were unlocked and reset so that the expected margin is zero. With zero margin, this block has a higher likelihood of a future unlocking.

Second, as I discussed earlier, the loss recognition testing margin on our other block, the HGAAP block, was $2.3 billion on a GAAP basis. However, given the new claims severity and in-force rate action assumptions, the earnings over the projection period display a pattern of profits for the next 15 years or so, followed by losses thereafter.

The profit period has a present value of approximately $3.5 billion, while the present value of the losses is a negative $1.2 billion, netting to the $2.3 billion margin. This is the result of the active life reserve assumptions being locked in under GAAP, and the increased premium or associated reduced benefits falling to the bottom line in the analysis, while the higher claim severity assumptions contribute to losses in later years.

This expected pattern has emerged for the first time during this year's margin testing, given our updated view on claims severity. Therefore, we will use a portion of the expected benefit from future in-force rate actions to fund the expected future losses during the expected profit periods, rather than being fully recognized in the period received. This change should help limit loss recognition testing margin deterioration in the future as we accrue an additional reserve liability for the future loss periods.

We've provided a lot of information this morning, so let me sum up on our margin results. Our GAAP and statutory margins are lower than last year, but remain positive in aggregate. We must, however, recognize a GAAP charge on our block of policies acquired before 1996, that that block must be tested separately. We also have reserve increases in our New York subsidiary due to its incremental negative margin, which excludes future rate actions. Finally, our US life capital and RBC levels remain solid, even after reflecting our new claim cost assumptions in our claim and our active life reserve processes.

With that, I'll turn the call back over to Tom.

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 impacts we're 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. Receiving 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 US population. And we will impress 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.

Ladies and gentlemen, at this time, we will begin the Q&A portion of the call.

(Operator Instructions)

Jimmy Bhullar, JPMorgan.

Hi, good morning. I just had a couple of questions. First, you mentioned the plan to reduce debt by $1 billion or $2 billion. I'm wondering if you could discuss the sources of cash through the Holdco in 2016. Obviously, you're going to get dividends from the Australia and Canadian MI businesses, but what are you going to get at the Holdco other than that? I'm assuming that you might not be able to get much dividends from the Life. Maybe that's my first question.

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.

So, based on working with rating agencies, regulators, and our feedback from external advisors, we believe that a target of $1 billion to $2 billion of debt reduction at the Holdco 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 dividends that we're expecting.

Hi, Jimmy. It's Marty. I think what we have in our cash plans are really the dividends -- 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. I'd remind you our annual debt services order of magnitude around $280 million.

We're also obviously going into the year here with significant liquidity at the holding company, probably over -- close to $400, or $350 million to $400 million over our cash buffer. So, 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.

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

No, it's more of a longer-term target. And we're looking at things, as Marty said, like selling LPI, 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. 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.

Yes. But it's a reasonable assumption that to do that paydown, you would need to sell assets reinsured businesses, because from the operations, the cash flows are somewhat limited, right?

That's right.

And then, another question just related to that, are there any implications if you do determine that there's a weakness in internal controls and your ability to do asset sales or do anything else in the short term?

Jimmy, I think this came up really in the third quarter related to our long-term care or disabled life reserve charge, and we had a manual process that got 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 error, if it is in fact a material weakness. We're still assessing that. And then, if it is a material weakness, we'll provide a remediation plan. I do think that -- we're still going through our overall control assessment, so I don't want to make conclusions right here but, at this point, I anticipate that, if it is a material weakness, it's pretty isolated to that particular situation. And if that is the case, I wouldn't anticipate any broader issues, as you describe.

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. I'm wondering why you did not do that for the Canadian business and is that something you'd consider?

The first thing I would say on all three MIs is that we think all three are performing well and they're our strongest businesses. In 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 looked at our market share versus competitors in the overall competitive environment. We do think, in Canada, there is the potential, based on what the housing regulators have said, that they may look to reduce the Housing Authority Corporation's guarantees and, therefore, the taxpayer exposure. So, we think that's a potential in the Canadian market to grow.

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 treatment.

Okay, thank you.

Suneet Kamath, UBS.

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?

Yes, you're right. Your beginning and ending balances are right, Suneet. 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, with one slight change, or maybe not so slight change, I'll speak to 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 and utilization assumptions; about $1.5 billion for interest rates as a decrease to margin. Then, on the positive side, about $4.9 billion pre-tax of premium in-force rate actions in the future. Then about -- we didn't really call it out, but roughly $500 million to $600 million of other adjustments, and those kind of really get you in the GAAP walk.

On the statutory side, it's really those same items. The present values are 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've 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 to cash flows. Then the other adjustment in statutory, which is not reflected in the GAAP margin testing, is that new reinvestment strategy I articulated, where we're, over time -- and, really, it takes a long period of time, as we're reinvesting in bonds, such that the average credit quality and the reinvestment strategy is BBB+. That takes probably 15 to almost 20 years in the model to get fully into that BBB+ category on average.

And then, similarly, we built in a small allocation to 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. Really, if you think about that $1.5 billion interest rate hit in margin on GAAP, it's a bit less on a statutory basis for those reasons.

And then, 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 changed, that would be very helpful. The second question I have is on the anticipated rate increases, I guess it's slide 5 of your LTC presentation.

So, it looks like your -- 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?

Yes, I -- that is in addition to the $380 million and $470 million. So those are future premium increases or benefit reductions that we'll 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's 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's 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. Long-term care is a guaranteed renewable policy. And 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 and all the states look at it.

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 or have you discussed this with all of them that you have to go back to and ask for price increases?

Suneet, it's really with the domiciliary regulators for US Life Companies. We do anticipate having a call with all the insurance departments here shortly to go over this type of information. It's really in conjunction with the consultation with the regulatory council -- the regulators of our domiciliary states. I would just point out, by the way, that one of the things that's in our future rate actions, which is a part of the overall blocks that we haven't had historically as much rate actions on, is Choice 1 and Choice 2, which really represent about a $1.4 billion -- a little over of $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 a big chunk of the future rate actions comes in to 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.

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, is the worst quarter we've seen.

So what -- 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.

Yes, Suneet, let me just -- I think the core is really -- we can maybe talk about this a little bit offline, but the core is a little bit higher number. But you're right, it is negative. That's the first time we've seen it negative. There are a number of kind of nonrecurring things between the reserve. 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 things are driving that. Really, part of it is really related to the new claim reserve assumptions that we put in place at the end of the third quarter. And there's a couple aspects of that. One is, as new claims come on to the books, we're now setting up a significantly higher reserve than we did in the past. So that's a pretty big difference that we're seeing this quarter.

Then, along those same lines with the new claim reserve approach that we have, we had less in the way of reserve releases on existing claims. Again, you'll recall that we updated our claim termination rates, so we think people will 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 means there will 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 had 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.

Got it. Yes, my core number just backed out the benefit of the rate actions. That's how I got from your minus $12 million to my number, but -- thanks again. We'll follow up.

The only thing I would say on that is, I think you have to count the premium increases of benefit reductions we're getting and there's 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 states on those old blocks and take that into account. So that's part of why you need the premium increases and benefit reductions going forward that we've laid out in 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. So, it's a lot of incremental premiums. Or, going forward, we think there may be more benefit reductions than premium increases, depending what policyholders decide. I think those are very important to restore the profitability of the in-force long-term care business.

Understood. Thanks for the time.

Sean Dargan, Macquarie.

Thank you and 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 a seed in some investor's 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 and two separate actuarial firms?

Hi, Sean, it's Marty. Actually, and I don't want to really speak to individual companies, but I think, actually, there's are a number of companies -- actually, more than a few -- that do include future rate actions in their GAAP analysis and, increasingly, as we've done the research, it looks to be in the statutory basis as well. So, and 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 the exception of New York, that if you look at the guidelines in cash flow testing, they typically point to actuarial guidelines. And 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 renewable.

Beyond that, we did speak with our -- the regulators in our domiciliary 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 developed the plan, we then spoke again with them and reviewed it. If that's helpful.

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

Yes, they 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.

Great. 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?

Certainly. It is a different approach. For us, as we test goodwill, is really kind of a two-pronged test. One is a test that looks at the overall value, including in-force and projected sales. And actually, for awhile 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 the value of new sales in both Life and Long-Term Care. As you recall, we did partially impair or write off the -- some of the goodwill balances in 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 agency issues and some of the other things that we may do, and dialing back sales to preserve capital -- along with some of the [strategic] options -- 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 that 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, as you saw on the historical GAAP block are still quite positive. So, we aren't in a situation where we're writing down DAC. Obviously, in the future, if we decide to report parts of our long-term care business separately from a GAAP accounting standpoint -- and certain 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, there would be -- it would be tested separately and there would be DAC write-offs in that scenario.

Okay, thank you.

Ryan Krueger, KBW.

Thanks. Good morning. On the sensitivities you provided to the active life margins, I had a couple questions there. I guess, first, how should we think about the interplay between the impact of lower interest rates and a lower discount 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?

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 whatever the portfolio rate is year by year, depending on the test or the scenario that's being used in a cash flow testing. But it is, effectively, the portfolio rate and, obviously, the portfolio rate does depend on interest rates as well as the spreads you're getting on your portfolio.

Okay. I see. So, if interest rates are lower as your portfolio yield comes down, you also lower your discount rates, so there's essentially two impacts.

Right.

Okay. And then, can you -- you show the sensitivities relative to the $4.3 billion statutory margin that's before PADS.

Right.

Can you help us think about what the sensitivities would be to the number that's already after the PADS? Because the sensitivities would be lower because you're already assuming some of this, I think, in the PADS.

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

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

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 this 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 a small block of term business that was in there. So BLAIC's RBC is now at 345%. The overall capital level in BLAIC is just over $800 million.

Thank you.

Colin Devine, Jefferies.

Good morning. I guess a couple 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 defined as the old block here -- it would fail the margin testing, so there is a deficiency on that, is the first question.

Second, and perhaps you have Dan Sheehan there who can talk to this, when you're looking at the changing the investment strategy, how much is that impacting the margin testing you've done here? And, what I'm getting at then is, how dependent on it -- how dependent is the testing on the success of that strategy? So, if we can clarify that.

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.

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 in 1996 and before -- really represents a lot of the older generation as well as the newer generation, since everything 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, it is a function of some of the 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 is in your note -- take some part of the old long-term care business and report it separately and manage it differently, 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 in 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, get a little bit more spread, we'd intend to reinvest in a -- it's a little bit lower credit-quality things such as the average portfolio would be BBB+. Similarly, we'd also have had historically generally 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 a reinvestment strategy and it's a very long duration portfolio, it takes quite a long time in the model to kind of build up to 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 a dozen years or so to build up to that 5% allocation. Clearly, alternative investments have a higher return in them than do fixed-income bonds these days. That was what was in our model.

Now, I'll turn it over to Tom for your last question.

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 set at the beginning of the year, it's all green on that page. I would say we think they're good businesses. They're 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're probably not sustainable at that level.

We still think, 2015, the loss ratios will be good, but I'll turn it over to Kevin to give you some more specifics on 2015.

Yes, Colin, the guidance as stated in Marty's remarks, in Canada, we're expecting it to be between 20% and 30% next year. Had great experience this year. We -- I think the thing -- and it's, to Tom's point, I don't think it's sustainable. It's still, even in our guidance, it's well within the range on our pricing expectations in Canada where we price the business.

I think we just need -- we're a little cautious right now as we observe the impact, as we play through 2015 on what the oil price is going to do to the country. That's something we're watching very closely. We think that's probably going to tap down the overall home-price appreciation experience in Canada and might have some pressure relative to that oil price, in fact, on overall unemployment. So, I think we're a little bit more cautious on it, but still a solid loss-ratio performance.

In Australia, we're targeting a 25% to 30% range in Australia. I think it's a lot of the same type dynamics. The Australia economy is holding up pretty well but, obviously, the RBA's 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're expecting some challenges to the economy.

We think there's absolutely going to be a moderation in home rates down there. We've benefited significantly in 2014 from curates in Australia where we've sold houses and not even experienced any losses associated with it because of the high home-price appreciation level. 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 two very, very favorable years from a loss-ratio perspective. And then the US 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.

Thank you. One follow-up for Marty. Marty, lifestyle protection, I think you acknowledged there's 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 DACs with it this quarter?

Yes, in a sense, it would be nice to clear the DACs 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 that to do what you describe would really entail calling it discontinued operations. And I think to do a lot of that stuff you have to have a pretty tangible plan where you feel extremely confident that you actually would execute a sale within about a year time frame.

So, while we're launching the sale, and hopefully we'll be in a position where, later on in the year, we'll be able to actually execute a sale, I think we're not quite to that point where we can get to that GAAP accounting threshold and do that. I would say that it's 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 where we're able to make that change in our accounting.

Okay, well, I hope you can get there in the next quarter. Thanks.

Well, the farther along we get, the better for us that we hope we move it along as well, too. Thanks, Colin. By the way, just to be definitive on your question on some of 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 we'd have negative margins.

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?

Yes, to be fair. Absolutely. Yes, we called out -- I think the impact of, on a GAAP basis, $4.9 billion, it's pretty similar on stat so you can certainly wind it in. We wanted to let the people to know what was in that assumption and the amount of premium that's in that assumption. Absolutely.

Okay. Thanks.

Geoffrey Dunn, Dowling & Partners.

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

Geoff, there was not an additional loss for accrual. I think, what we see in the US business, and we're continuing to see positive emergence of our early-term delinquencies. But we made no adjustment 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 at a 1 in 6 times from a frequency standpoint, trending more towards 1 in 7, but we need to see more sustained performance on that.

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 delts continue to age. When you look at that all together, our reserves are performing -- our business is performing consistent with our reserve expectations, but we had no adjustment this quarter.

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

We put no reinsurance agreements in place this quarter. We did make some nice progress working in the US business, if that's your question, with reinsurers consistent with our plans to be compliant from a PMIER standpoint. So we've made a lot of progress with the reinsurers.

Where we stand, though, is we still don't have the PMIER standards -- they're not final. And, until they're final, we won't know exactly how they're going to gauge the insurance. So we're working on that and are in good review right now with the GSEs as well as with our state regulator.

Okay. But, at this point, you're still going down the XOL route versus quota?

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

All right. Great. Thank you.

Steven Schwartz, Raymond James.

Good morning, everybody. A 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?

Not exactly, and I was wondering when this question would come up because it is a 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 a positive earnings. And then it becomes negative after that, kind of under the way we've been reporting. And that, 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 of positive and the $1.2 billion negative, you still have positive margin at $2.3 billion.

But GAAP accounting -- 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, though, there's 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 that -- what we'd anticipate doing is taking -- given that we now have a different view of severity on the existing book, we would probably take some of the future rate actions on this existing book that we're tending to get and, rather than having the normal course as we would do, have that all hit the bottom line as we get those additional premiums or as you get reserve releases. We'd rather take some of that benefit and spread the -- and fund the liability for those future losses.

Again, I'd remind you that this really relates to the block business we had at the point in time we did the cash flow -- I'm sorry, the margin testing, so it's as of year end. So any new business that we would write is really not part of this. It's really reflective of the block that we have on the books right now. But we'll -- basically, what we'll take is part of the benefit we'd get from future rate actions, rather than 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 of present value losses would be effectively zero with that liability we'd build up.

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

No, no, not at all. This is all within the existing block we have of long-term care. Basically, as we're projecting forward, we would take our new view of claims which creates some losses in future years, along with our new view of future rate actions, and change the accounting recognition for those future rate actions so that some of that would be building up as a liability or a reserve, if you will, against those $1.2 billion losses. Because it's all within the long-term care line of business.

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

Yes.

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

Yes, I'm not sure I'd look at it quite like that. I think what -- in fact, this doesn't really change the margin testing. What it does is it changes the pattern of GAAP earnings recognition for the future rate actions. I think that's maybe a way to think about it, where, if we did nothing, we'd get these future -- let's go on 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 on reduced 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 would 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 -- or what we need to do, is set up a accrual for a liability to fund that period of time when there are those were future losses. 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 only part of that benefit and then set aside the remainder of that benefit and kind of accrue a reserve or a liability against those losses.

All right. So deferred profit liability is 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?

That's correct.

That doesn't strike me as ridiculously high. I mean a lot of companies are around 25%. Why do you -- I don't understand why you think you really need some significant action here.

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've made no decisions on any of these.

We believe we have more flexibility if the debt was $1 billion to $2 billion lower than 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 payers, if you will, of the debt service -- now USMI, we think in a few years, as it builds earnings and the unassigned surplus from the loss shares goes away, it will also be a payer of dividends.

We don't think -- we have long-term care. We are looking to improve the capital -- 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'd have to reduce the debt around that range, given the current cash capital generation of our operating subsidiaries.

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

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

Sure. Okay. Thank you.

Again, we haven't made any decisions and I think the debt paydown Tom talked about would be designed to give us flexibility to do other options, whatever they are. But I think with our current earnings streams and mix of businesses, I think we -- the debt [load] is quite manageable.

But what we'd like to do is pay down a billion or a couple billion to have more strategic flexibility, if you will. But I think with the status quo of what we have, while it's a little bit more debt than we'd like, we certainly think it's very manageable with the flows we'll be getting from Canada, Australia, USMI'll 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 let that capital base build back up.

Okay. Thank you.

Ladies and gentlemen, we have time for one final question. Scott Frost, Bank of America.

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 of future claims. You're saying that increased by $5.4 billion. Is that what you called out in the release? And then, you're offsetting that by $4.9 billion of additional premium increases. And this leads to the second question here. Is that the right way -- am I thinking about that the right way?

Right, the $5.4 billion is really represented in the present value future claims and expenses lines.

Okay.

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

Okay. Now, that's what I wanted to ask 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 billion annually, or whatever, is what you're supposed to be getting. Am I assuming kind of a similar ratio of -- in that $4.9 billion of rate increases you've already gotten versus rate increases you expect to get?

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 margins that I referenced is really associated just with the incremental premium that we would get in the future. At its peak, that's $525 million to $625 million. What happens is, as we implement that, and you look at that in our modeling, it kind of builds up over time.

It takes us about 15 years to really get that fully implemented. But it -- so it ramps up pretty slowly, and then actually it ramps down pretty quickly as the number of active lives paying that premium comes. So it's really just about four or five, six years where we're getting additional premium in that neighborhood. But the $4.9 billion is associated only with that, what we say there, would be anticipated peak actual additional premium.

So the other premium that we reference that we've gotten to date, the $380 million to $470 million, is really just trying to give 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.

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

That's all in the future.

That's all in the future. (multiple speakers) But that has to be requested from regulators and approved? I'm correct?

That's right. (multiple speakers)

For your debt reduction, what I count -- it sounds like, over time, and I'm looking at your debt maturity schedule, looks like you've got $300 million due in 2016, $600 million in 2018, $400 million in 2020. 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 million to junior subs, is that contemplated as part of the plan of reduction?

There's 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 and the options we should be looking at that, if we did choose those, those might accelerate those paydowns. If we sold the business or did something different or put something in Runoff -- there are a variety of different things -- would that create some capital that would give us the opportunity to do something quicker, if it made sense to do it on a economic scenario? So, obviously, how we think about the paydown of debt is going to be a function of what we decide to do strategically, and they're very intertwined.

So, again, that sounds like -- that implies tenders or open-market purchases?

Yes, if we did do that approach -- you're exactly right. If we -- if, for example, we sold a business and had some capital, we might then say, well, let's -- rather than waiting for the maturity, we might then do a tender. And, again, we have different, obviously, tenors with different maturities and different costs. And we'd look at all that in that particular market and decide if we wanted to do a tender or some open-market purchases, or what have you.

Okay. Great. Thanks a lot. That's it from me.

Thank you for your question.

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

Thank you, Christy. 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 that 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 is 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.

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.