Genworth Financial Inc (GNW) 2017 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Genworth Financial's Fourth Quarter 2017 Earnings Conference Call. My name is Kathie, and I will be your coordinator today. (Operator Instructions) As a reminder, the conference is being recorded for replay purposes. (Operator Instructions)

I would now like to turn the presentation over to Tim Owens, Head of Investor Relations. Mr. Owens, you may proceed.

Thank you, operator. Good morning, everyone, and thank you for joining Genworth's Fourth Quarter 2017 Earnings Call. 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 Sheehan, Chief Investment Officer, will be available to take your questions.

During the call this morning, we may make various forward-looking statements. Our actual results may differ materially from such statements. We advise you to read the cautionary notes regarding forward-looking statements in our earnings release and related presentation as well as the risk factors in our most recent annual report on Form 10-K as filed with the SEC.

This morning's discussion also includes non-GAAP financial measures that we believe 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 the results of our international businesses, please note that all percentage changes exclude the impact of foreign exchange. And finally, references to statutory results are estimates due to the timing of the filing of the statutory statements.

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

Good morning, and thank you, for joining today's earnings call. Since announcing the Oceanwide transaction, we have followed the general market practice of not holding quarterly earnings calls.

However, given the delays we've experienced in closing our pending sale to Oceanwide as well as our desire to explain the important items that impacted our earnings in the fourth quarter, we wanted to provide our investors with an update.

I will start by providing a brief overview of our strong 2017 financial performance; the excellent progress we've made towards obtaining long-term care premium rate increases, which is a strategic imperative for Genworth and the LTC insurance industry overall; as well as update you on the pending transaction with Oceanwide.

Kelly will then provide a more in-depth update on our fourth quarter and full year results and the significant items that impacted these results. Following our prepared remarks, we will open the call to questions.

I am very pleased with Genworth's operating performance in the fourth quarter and full year 2017. We returned to profitability, generated solid operating results, particularly across our Global Mortgage Insurance platform, and made significant continued progress against our multiyear long-term care insurance premium rate action plan.

For the full year, net income was $817 million, the first profitable year for Genworth since 2013, and adjusted operating income was $696 million or $1.39 per diluted share. These strong full year results were primarily driven by solid performance in our MI businesses, particularly in U.S. MI, which generated $311 million in full year adjusted operating income, a 24% year-over-year increase, as well as smaller reserve charges taken in our U.S. life insurance businesses.

We finished the year on a high note, with fourth quarter adjusted operating income of $326 million or $0.65 per diluted share. Our after-tax fourth quarter results were impacted by a number of significant items, which Kelly will discuss in more detail in just a few minutes. I was particularly pleased with our fourth quarter segment level results across the global MI businesses.

In U.S. MI, fourth quarter adjusted operating income increased 21% year-over-year, driven by insurance in force growth and strong loss performance. In Canada, adjusted operating income increased 10% year-over-year as we continued to experience a strong housing market. And in Australia, adjusted for the earnings curve charge, there was solid underlying earnings performance in the quarter.

In U.S. Life Insurance, we took a universal life insurance after-tax charge of $74 million to increase reserves, primarily reflecting updates to our mortality rate assumptions and low interest rates. Although, the LTC insurance business experienced unfavorable claim termination performance in the second half of the year compared to the first half of the year, we continue to make very good progress on our LTC multiyear premium rate action plan.

When I was hired by the Genworth board in January 2013, I was given a mandate to fix the legacy LTC insurance books of business. The most problematic policies comprised 4 separate books of business or policy forms and were written or purchased by Genworth from the mid-1970s to approximately 2005. These legacy policies represent approximately 50% of our in-force premiums.

As shown on Slide 13 of the earnings presentation, Genworth has achieved significant annual premium increases from 2013 through 2017 on our in force policies. There's significant leverage to Genworth's cash flow from these annual premium increases because the higher premiums are expected to be paid over decades into the future. Based on proprietary premium increase models that Genworth has developed in the last few years, we estimate that we have achieved approximately $8 billion of approved rate increases since 2013 on a net present value basis.

Genworth will continue to seek additional annual premium increases on our in-force policies under our multiyear rate action plan over the next 5 to 7 years. We estimate that these annual premium increases will add an additional $8 billion of future cash flow to Genworth on a net present value basis.

Genworth uses our best estimate of future cash flow in our U.S. GAAP loss recognition testing and statutory cash flow testing. In addition to the increases we posted to our LTC insurance reserves in 2014 and 2016, the remaining future cash flow from already approved premium rate increases and the projected $8 billion of future cash flow from a multiyear rate action plan provides significant material benefits in our U.S. GAAP and Statutory Margin testing.

I believe Genworth has been the most successful insurance company in improving our legacy LTC books of business because we have developed a seasoned, expert LTC in force management team of 35 professionals under the leadership of Elena Edwards, a 20-plus year executive of Genworth. The sole focus of this team is to seek premium increases and associated benefit reductions on our in-force LTC insurance policies, and this team reports directly to me.

Let me now provide an update on the Oceanwide transaction. Since October 2016, Genworth and Oceanwide have worked tirelessly to attain the required regulatory approvals and satisfy the closing conditions of our pending transaction, under which Oceanwide agreed to acquire Genworth for an all-in cash consideration of $5.43 per share.

In addition to receiving approval from our stockholders, with over 96% of the votes cast in favor of the merger, we have made significant progress across the necessary regulatory approval processes. This includes receiving approvals from the Virginia, North Carolina, South Carolina and Vermont state insurance regulators. We're also actively engaged with the New York Department of Financial Services, the Delaware Department of Insurance and the Committee on Foreign Investment in the United States, or CFIUS.

As you saw in our release, Genworth and Oceanwide announced they have refiled their joint voluntary notice with CFIUS. We also provided CFIUS with an additional mitigation approach to further protect the personal data of Genworth policyholders, the structure of which includes the participation of a leading U.S. third-party data administrator. We believe the refiling includes a meaningful improvement in our mitigation approach and is a positive next step in our process, and we are fully committed to developing a risk mitigation plan that is acceptable to all parties.

As I said at our Annual Stockholder Meeting in December, the main issue delaying the completion of Delaware's review has been a difficulty in reaching agreement on the fair market value of GLAIC as part of the unstacking. Based on the GLAIC sales process Genworth pursued in 2015 with updates in 2016, Genworth and Oceanwide believe the fair market value of GLAIC is $700 million. At that valuation, the unstacking would have been accomplished through a combination of $525 million contribution from Oceanwide and the previously committed $175 million from Genworth.

The Delaware Department is conducting their own GLAIC valuation based on the advice of an independent third-party expert which we believe is higher than Genworth's valuation.

Based on the difference in opinion on the fair market value for GLAIC, Genworth and Oceanwide continue to discuss how to address this issue in order to move forward with the approval process. Finally, as discussed in December, given the delay in closing the transaction, we have explored and reviewed several options to address our $600 million of debt due in May 2018.

Following our due diligence, we have decided to move forward with a secured debt transaction in order to address this maturity, which we intend to launch in the near future. Additional details regarding the terms and structure of the financing will be disclosed at the time of the launch. As I have reiterated many times before, we continue to work hard with Oceanwide and with our regulators to successfully complete the transaction as soon as possible. We firmly believe that this transaction will deliver the best possible outcome for Genworth stakeholders and maximizes Genworth's stockholder value.

Now I will turn the call over to Kelly, who'll provide further details on our financial performance and other financial and operating updates.

Thanks, Tom, and good morning, everyone.

Today, I will cover our fourth quarter earnings results and key drivers, capital levels of our subsidiaries and holding company cash.

I will also spend time providing additional details on our U.S. life assumption review, the U.S. GAAP treatment of the Australia earnings curve adjustment and the tax items Tom mentioned in his opening remarks.

Let's begin with this quarter's overall financial performance. I'm pleased to report net income for the quarter of $353 million and adjusted operating income of $326 million.

Our results included approximately $220 million of net favorable items that included $456 million of favorable tax items, $152 million of unfavorable items related to the U.S. GAAP treatment of the Australia earnings curve adjustment and $84 million of unfavorable items relating to the U.S. Life assumption review, all after tax.

Turning to the segment results for the quarter. We saw very good loss performance across our mortgage insurance platforms. Beginning with U.S. MI, our reported fourth quarter loss ratio was 22%, up 2 points sequentially and down 6 points versus the prior year. While we did see elevated new delinquencies from hurricanes Harvey and Irma, our experience indicates that these delinquencies have different ultimate claim rates. And therefore, we have lowered the frequency factors for those incremental delinquencies accordingly.

The impact of the incremental hurricane-related delinquencies was approximately $5 million pretax or a 3 point impact to the loss ratio in the quarter. The full year reported loss ratio of 15% for 2017 is down from last year's 24%, reflecting continued improvement of our book and the strong U.S. housing market.

New insurance written was $10.2 billion, down 10% sequentially, driven by a seasonally smaller purchase origination market and 8% versus the prior year, primarily from a modest decline in market share. In Canada, the fourth quarter loss ratio decreased 5 points sequentially to 9%, reflecting a reduction in average reserve per delinquency from a lower mix of delinquencies from higher severity regions such as Alberta and Québec.

Year-to-date performance has been excellent, with a loss ratio of 10%, which is below our original full year expectation as well as at the low end of our 10% to 20% updated range provided last quarter. Flow NIW was down 20% sequentially, primarily from a seasonally lower origination market and down 13% versus the prior year, primarily from a smaller market size from regulatory changes introduced in 2016 and 2017.

I next want to spend a few minutes on the Australia earnings curve and how this impacted our fourth quarter results. As disclosed in mid-December 2017, Genworth Australia finalized their annual review of their premium earnings pattern or earnings curve and adopted this change effective October 1, 2017. As a reminder, our business in Australia is predominantly a single premium product paid up front with revenue recognized over the expected loss emergence pattern.

The annual review revealed that the duration of time between the policy inception and the first missed payment date has extended to be longer than the duration in our previous assumptions. The longer estimated duration is driven primarily by 2 factors: one, the mining downturn, predominantly seen in Western Australia and Queensland; and two, a prolonged period of low interest rates that has resulted in a very robust housing market outside of the previously mentioned areas.

Under our U.S. GAAP accounting policy, we are required to make a full re-estimation of the unearned premium reserves or UPR balance. In other words, we're required to reflect in our quarterly results not only the current period but also the cumulative effect from the inception of every active policy to date for all prior periods. That re-estimation resulted in an increase of the UPR balance and a corresponding reduction to earned premiums of $468 million. In addition, since amortization of deferred acquisition cost, or DAC, follows the same recognition curve, the DAC asset related to Genworth Australia increased $18 million with a corresponding decrease to DAC amortization expense.

In total, on an after-tax basis and after adjusting for noncontrolling interest, the negative net income impact to Genworth from the new earnings curve was $152 million, including $141 million reflected in the Genworth Australia segment and $11 million reflected in the corporate segment, where certain tax amounts are included.

I would like to emphasize that the change in the earnings curve is not a result of a change in the total amount of expected premiums or losses over the policy life. It merely reflects that the timing of losses from policy inception has changed and in this case has extended past our previous assumptions.

Overall, our current book of business in Australia is performing at or near pricing expectations. While our U.S. GAAP policy applies a full retroactive re-estimation for the adjustment, Australia IFRS takes a prospective approach, meaning the UPR balance is not reset, but the future premium recognition is modified. As a result, Genworth Australia results in certain metrics, for example, loss and expense ratios, will be materially different in the current period and subsequent periods under U.S. GAAP and local Australia accounting standards.

Under U.S. GAAP reported results for the quarter, the reported loss ratio for Australia was negative 7% or would have been a positive 28% excluding the earnings curve adjustment. New delinquencies in both mining and non-mining regions were down sequentially and versus the prior year contributing to favorable loss ratio trends excluding the impact of the earnings curve adjustment.

Starting in fourth quarter '17 for U.S. GAAP, earned premiums and DAC amortization expenses reflected the application of the new earnings curve pattern, which positively impacted net income results for approximately $5 million. For the full year, the U.S. GAAP reported loss ratio was negative 79% or would have been a positive 33% without the earnings curve adjustment as compared to our full year updated expectation of 35% to 40%.

Moving to our U.S. Life Insurance segment. Our reported fourth quarter results were largely driven by the impact of our actuarial assumption review. In long-term care insurance, we continue to see lower claim termination rates in the second half of the year generally consistent with prior trends as well as an overall growth in new claims as the block ages. We expect these patterns to continue into the future.

As Tom discussed, we made very good progress with our rate action plan approval during 2017. For the full year, we received 114 approvals on policies with $714 million of annualized premium at a weighted average increase of 28%. The after-tax benefits of prior period approvals in incremental premium and net reserve changes in the fourth quarter were approximately $110 million, reflected in the results.

We've also completed our GAAP Active Life margin testing. The results of our testing for the total LTC block, both HGAAP, representing policies written since late 1995, and the acquired block, or PGAAP, was a combined positive margin of approximately $0.5 billion to $1 billion, which is lower than our 2016 margin of $1 billion to $1.5 billion.

The PGAAP block margin continues to be low, but positive generally in line with last year. Our experience for the LTC block is still emerging, particularly on our newer products. As Tom discussed, it is important that we closely follow these emerging patterns and mitigate any adverse results earlier with smaller and more frequent rate actions, versus delaying action, which results in a compounding and magnification of the price action needed to be actuarially equivalent.

As a result of our fourth quarter review, we bifurcated claim frequency rates between policies with lifetime benefits and policies with limited benefits. While our previous aggregate assumption fit our overall experience well, we have noticed a difference in frequency rates between these 2 types of policies as policyholders with lifetime benefits have a higher propensity to claim given their unlimited pool. Our in-force rate action plan continues to be an important driver to mitigate any adverse experience in our margins, as Tom discussed.

We estimate that future not yet approved rate actions will benefit our loss recognition testing margins by approximately $8 billion. This is in line with our estimate last year as we enhanced our modeling of future premium increases, updated our assumptions for policyholder behavior and made modest changes to increase future justifiable premium increases. These overall benefits were offset by progress made during 2017 on implementation and approvals rate actions.

One last note on LTC. There's been a lot of interest over the last 2 weeks regarding our exposure on certain assumed LTC blocks that were subsequently reinsured to GE's Union Fidelity Life Insurance Company, or UFLIC, subsidiary. As GE had announced, GE does have LTC exposure beyond this UFLIC subsidiary as a part of their Employers Reassurance Corporation, or ERAC, subsidiary, which was also a part of their reserve increase announced a few weeks ago. GE has assumed the risk on the UFLIC block and sets the assumptions. We have no net economic exposure or liability associated with the UFLIC block.

It should also be noted that even within our own LTC business, performance varies significantly depending on issue year, daily benefit amounts, inflation benefit options, underwriting, rate actions implemented and other factors. The charges GE is taking and the charges Genworth took in 2014 and 2016 illustrate the severity of the issues facing LTC insurers and the need for appropriate and timely premium rate increases or benefit modifications to ensure the adequacy of cash flows and reserves to pay future claims.

Turning to Life Insurance. Results for the quarter were driven by a $74 million after-tax charge for assumption and model updates. Overall life mortality remains elevated although consistent with experience in prior quarters, and we continue to see higher lapses in our 15-year and 20-year blocks entering their post-level premium periods. This expected trend in lapses will drive higher DAC amortization in 2019 and 2020 as the large 20-year level term policies written in 1999 and 2000 get to the end of their post-level premium periods. This will occur because of the locked-in nature of assumptions under current U.S. GAAP accounting, and we would expect that accounting treatment to drive losses in the term life products within those years.

The assumption and model updates reflect updated future expected mortality assumptions, updated reinsurance models and routine updates for interest rates, portfolio yields and expenses. The mortality assumption changes focused on mortality deterioration during the post-level premium period for Term UL products and older age mortality for certain older blocks of universal life. We are seeing credible experience emerge in these older cells and continue to monitor how our actual experience develops.

Moving to fixed annuities. We saw favorable mortality and higher variable investment income in the quarter. We also recorded a net $38 million after-tax charge from updates made to the loss recognition testing on single premium immediate annuities, or SPIA, somewhat offset by an $8 million benefit on single premium deferred annuities related to investment spread assumptions. The updates to SPIA reflect expense classification and impacts from the low-yield environment including faster prepayment and refinancing activity on corporate bonds, which reduces our go-forward investment yield. Any capital gains from corporate bond refinancing activity have been recorded below the line as nonoperating income. But the loss recognition results have been included in operating income, creating a little bit of a geography issue, given our stated definition of adjusted operating income.

Now, I'll move to capital levels where our mortgage insurance businesses continue to maintain their very strong capital positions. In our Canada MI business, we had an estimated capital ratio of 168%, which continues to remain above the company's operating MCT, or minimum capital test, target range of 160% to 165%. Canada MI continues to experience solid underlying performance, paying $12 million of ordinary dividends to the Genworth holding company during the quarter.

For our Australia MI business, the estimated capital ratio was 193% at the end of the fourth quarter, which is above the high-end of our 144% PCA, or prescribed capital amount, target. The change to the earnings curve is expected to have minimal impact to GMA's regulatory solvency ratio going forward.

During the quarter, Australia MI sent $15 million to the Genworth holding company from their previously announced share buyback program. With these actions, the international businesses have delivered a total of approximately $135 million in dividends to the holding company for the full year. Acknowledging Australia's high level of capital, we do anticipate that they will resume their share buyback program now that their fourth quarter 2017 earnings have been announced, of course, subject to market conditions.

In U.S. MI, we finished the quarter with a PMIERs sufficiency ratio of 121% or in excess of $550 million above the PMIERs requirement. The PMIERs ratio was impacted negatively by approximately 4 points from the incremental hurricane-related delinquencies. We've received a summary of proposed changes to PMIERs from the GSEs. These changes are still subject to comment by the private mortgage industry, including Genworth. If these standards were adopted as drafted, with an effective date of December 31, 2018, we estimate we would be compliant, although it would be at a significantly lower excess amount. Given the continued strong performance and strengthened balance sheet of our U.S. MI business, we expect to restart dividends in 2018 while remaining within the draft PMIERs standards.

Our U.S. Life capital levels will be impacted by our ongoing statutory cash flow testing processes, including prior year phased-in reserve increases, stand-alone testing requirements such as AG 38 and the recently enacted tax reform. We are currently working through these impacts, which could be significant. We will disclose these results when finalized closer to our 10-K filing, expected in late February 2018.

I did want to spend some time discussing the recently enacted Tax Cut and Jobs Act and its effect on our business as well as the release of our tax valuation allowance. We view this major overhaul of the U.S. federal tax system as an overall positive for the U.S. economy as well as a benefit to the insurance industry through the simplification that it provides. While providing lower statutory taxes rates will improve cash flows over time, the reform also greatly reduces complexity by simplifying certain tax-specific insurance, reserving requirements and international tax provisions.

As highlighted in our press release, we recorded a net noncash tax benefit of $456 million in the fourth quarter. The benefit was primarily related to 2 items: first, we released our $258 million tax valuation allowance that we had established last year, with the expectation we will not be able to use all of our foreign tax credits prior to expiration. Given the strong performance of our businesses this year and improved forecasts moving forward, coupled with the revised tax rules and our current plans, we now expect to fully utilize those FTCs.

Separately, tax reform also required the remeasurement of our net deferred tax liabilities with a lower future tax rate, which flows through as income during the period. At the segment level, admitted deferred tax assets, or DTAs, on our U.S. MI and U.S. Life statutory books will be remeasured to the lower rate. This impact to the remeasurement will preliminary reduce admitted DTAs by approximately $110 million in U.S. MI and $260 million in U.S. Life. Given some changes in the tax rules, the additional projected FTC utilization will partially offset the decline to admitted DTAs. This net impact to U.S. MI's risk to capital is minimal while the impact from tax reform to the consolidated U.S. Life risk-based capital calculation will be a decline of approximately 20 points.

Statutory cash flow testing results may also be impacted by the change in the tax rate. This may impact certain legal entities which have negative statutory margins such as our New York subsidiary, Genworth Life Insurance Company of New York, or GLICNY.

Lastly, if the NAIC RBC factors were to be adjusted to reflect the lower tax rate, we estimate a reduction to the U.S. Life consolidated RBC of approximately 50 to 60 points. This will not impact 2017 year-end RBC ratios but would impact the RBC ratios at the time the factors are changed.

Moving to the holding company, we ended the quarter with approximately $870 million of cash and liquid assets, which exceeds our targeted 1.5x annual debt service in restricted cash plus $350 million buffer. One reminder on our holding company cash as you think about forecasting into the future is that we typically have more outflows related to annual employee-benefit payments during the first quarter that are reimbursed by our subsidiary companies throughout the year.

Speaking of holding company cash, I do want to elaborate on our planned solution for our upcoming debt maturity that Tom mentioned. Over the last couple of quarters, we've evaluated a number of options to address this debt maturity given the delay in the merger with China Oceanwide. These have included holding company cash, asset sales and/or certain refinancing options. We have identified pursuing a secured term loan as a preferred solution at this time to address this maturity while we continue to work to complete the Oceanwide transaction. The proceeds from this refinancing along with some holding company cash would be adequate to allow for the full retirement of the upcoming maturity as well as flexibility to continue to work towards the completion of the Oceanwide transaction. We will provide further details at the appropriate time once the deal terms have been announced to the market.

To sum things up, we feel very good about the continued strong performance of our mortgage insurance businesses but recognize the challenges within the U.S. Life Insurance business. Going forward, we will continue to focus on our key financial and operational priorities, including strengthening the balance sheet, stabilizing and improving ratings over time and executing our multiyear rate action plan.

With that, let's open it up for questions.

(Operator Instructions) And we'll take our first question from Ryan Krueger with KBW.

Can you give us some sense of what business or businesses the term loan would likely to be secured by?

Ryan, it's Kelly. I really appreciate the question. Right now, we're not going to disclose that, because we -- like we mentioned in the press release and in my remarks, we're going to launch this really in the near term. So we will provide that information as soon as we launch it. Obviously, that launch is going to be subject to market conditions and consultation with our advisers. But right now, I mean the one thing I would point you to is we did say we would issue the term loan as well as use some of our holding company cash, so that can give you a view on sort of the sizing that we're thinking about.

Okay. And then, moving to the Delaware insurance approval process. Can you give any more color on the magnitude of disparity between the disagreement over GLAIC valuation? And then, what -- I guess other than just you agreeing to put more capital into GLAIC, what are the other -- what are the solutions being considered?

So Ryan, it's Tom. I'll take that one. Thanks for the question, it's a good one. First thing I would say is, as you know, there are different ways to value GLAIC. You can -- what's the fair market value a willing buyer would pay. And then obviously, discounted cash flows, and those have all different kinds of assumptions. I think it's the position of Genworth and Oceanwide, because we did do a very significant sales process for GLAIC in 2015, and we updated that just before we -- the board decided to go forward with the China Oceanwide deal. We did get an update in '16 from those most interested in GLAIC as to where they were on pricing. So we feel strongly, Genworth and Oceanwide that right way to value GLAIC is what that fair market value process led to, which is $700 million.

I think Delaware has an outside adviser, they're still doing work. They're certainly looking at the values that others had did but they're also doing a discounted cash flow. So I think we're still in discussions with that. And it's one of the reasons that I think companies tend not to have these conference calls during a transaction is because there's a lot of things you want to know, but we really can't comment, because we're in active negotiations, and in our case, primarily with Delaware and CFIUS. And so we think it would hurt, I think you can all understand it, hurt Genworth and our shareholders and shareholder value if we started to talk about what those negotiations might be.

But coming back to your question on Delaware, I think there are number of options in terms of what's the ultimate value. But also should we do the unstacking or not. So there are just many things still to be determined. And as I said, Delaware I think is still working on their valuations.

And then just one last one. We haven't heard much on the process with the New York DFS and if there are some -- anything specific there that there's a disagreement on, can you give any sense of that -- those discussions?

So obviously, we've had discussions with all the regulators, including New York. I think that's proceeding well. New York has tended on behalf of all of the regulators. And all 50 regulators are interested in this deal, given the financial condition of GLIC. And I think their focus has been on the protecting the private data and cyber security and those things. So they're working on that. But I think with New York, based on my discussions with them, I think that process is going reasonably well.

We'll take our next question from Jimmy Bhullar with JPMorgan.

The first question I had was just on the CFIUS refiling. Have you gotten input from them or comments from them that data is the specific issue that they were concerned with? Or how do you feel about your chances of easing those concerns?

So, with CFIUS, as you've probably read, the CFIUS process is a very confidential process. So I'm not able to give you any view on what CFIUS thinks. But our view and based on, again, what our general understanding is and based also on what's been made public on other CFIUS deals, is we think it's important to protect the private information of our policyholders or our U.S. MI, U.S. customers. And therefore, we have all along in our previous discussions and filings have focused on trying to create as strong a mitigation plan as we can.

We think this new structure with a prominent U.S. third-party data security administrator makes our mitigation plan much stronger. As far as I know, it's unique in that I don't think in other deals it was proposed. So we've refiled with that. We think it makes our mitigation plan much stronger. How CFIUS will interpret that, I don't know.

And you're not sure the data is the only issue, right? Because there's a lot of concern about sort of political relations between the U.S. and China, and whether the deals from China are going to be more restricted in the future. So...

Yes, I would just say, I'm not really able to comment on what the CFIUS view is.

And then any thoughts on the magnitude of dividend that you could extract from the U.S. MI business in 2018 and in future periods?

We've got the draft PMIERs 2.0 standards. Those really haven't been shared with the market. But we do think that a modest level of dividends this year is very appropriate, and staying well above PMIERs 1.0 and well within PMIERs 2.0. Going forward, we do have current unassigned surplus; about $250 million worth of unassigned surplus, so there's no regulatory restrictions on the U.S. MI dividends. But we do think also going forward, there -- as long as we maintain those strong capital levels, we could get both ordinary and extraordinary dividends.

And what do you -- like is modest less than $50 million? Or is it -- how do you define modest for this year?

Yes. We're not going to say exactly what we're going to dividend. I appreciate the question; I understand you're trying to do a cash roll forward. We're going to get it online. We're going to evaluate the level of capital just based on how the final PMIERs 2.0 comes out. And we'll give you more information as we go through that. But in the next couple of quarters, we would expect to see a dividend from U.S. MI.

And then lastly, could you sort of give us some details on what really drove the reduction in the active life reserves and LTC? I think it declined about by about $0.5 billion.

Yes, Jimmy. Yes, we go through a extensive process every year. I appreciate the question, by the way, because it is a very important one as we think about margins. And the one thing we need to think about related to long-term care as well is, as you know, it's a very long product with net present value of claims of over $50 billion. So a small decrease in margin, even though $0.5 billion is a lot, when you think about it in context to the net present value of claims, it's not quite as big as you might think.

Really what drove it, and I think we talked about this a little bit in our press release last quarter if I remember. But the biggest change was as we were looking at emerging experience between our policies that had lifetime benefits and our policies that had limited benefits, we saw really a difference in incidence of claim. I think I mentioned in my prepared remarks that, for the policies with lifetime benefits, there's really less of a hindrance for them claiming, because there's really no opportunity for them to exhaust the benefit pool. And so, if you have limited benefits, you've got to think about preserving those to the times that you're most ill. So that was really the nature of the biggest changes to the margin overall. Is that helpful?

Yes.

And I would -- this is Tom. I would just add that we've been working with the regulators, I think, in a very positive way. And I think regulators are becoming more open to premium increases in order for us to be able to pay the future claims. And I do think that you shouldn't make too much out of the absolute level of the margin, because what I've -- what we've agreed to with the regulators that over time, we're trying to get the cash flows to breakeven. So one of the -- you would expect the margin to remain positive but not far above 0. Because, in effect, that is what we agreed to with the regulators that we would seek premium increases, so we remain positive on the margin but not necessarily with a big cushion. So I just -- my own view is, you shouldn't look too much at the absolute value of the margin.

Now take our next question from Sean Dargan with Wells Fargo.

Kelly, I just want to run through RBC. So it sounds like the total impact from tax reform, numerator and denominator, is 20 point hit to 2017 RBC plus an additional 50 to 60 point hit in 2018.

Thanks so much, Sean, for the question. When we look at the 20 point impact on 2017, yes, that's our view; and really what's driving it is that $250 million just revaluation impact. But that's partially offset by better ability to utilize foreign tax credits under the new rules. So that's really just your admitted DTA goes down because of the revaluation.

Regarding 2018, I don't think it's determined yet as to whether the factors for risk-based capital are going to change in 2018 and whether they're going to be phased in, whether they're going to be adopted later. But what we wanted to give you a view for is based on our year-end 2017 capital levels, if the factors were changed strictly for the new federal tax rate, that impact would be roughly 50 to 60 points. A lot can happen from an operational perspective over the year that would change that impact, but that was really sort of a pro forma view based on 2017 capital. So undetermined as to how the phase-in or when those factors are going to be changed at this point.

Okay. And I have a related question. And it kind of ties into what I think somebody asked at the Annual General Meeting. But there's a possibility that you may need to strengthen statutory reserves as a result of cash flow testing. And your RBC is going to go down as a result of tax reforms. So are you -- is the holdco legally required to put cash into GLIC? Or what kind of RBC ratio is acceptable to you? Because you're not really selling the business, and you don't need to defend insurance financial strength ratings.

Well, Sean, there is a regime by the regulators in terms of where the RBC is where you have to create a plan with them. And that's at an RBC level well below where we are. I think it's (technical difficulty) where you have to work on a plan with them. So there's quite a bit of room. Clearly, it's important. The higher RBC, the higher the ratings. And if we were actively selling life and annuity business, that would matter. But clearly, we want RBC, and we've worked hard to have as high an RBC as we can have. But certainly, there is no significant issue around the RBC ratio until it starts to drip below where the regulators step in and require a specific plan to address them.

Yes, Sean. It's Kelly again. I'll add one thing to that. When we think about it, and you think about GLIC consolidated as the parent company of the U.S. life division, we're dependent on $8 billion of future in force rate action. And so, we're not sitting on $8 billion at the holding company to make up that difference. This is going to be dependent on getting benefit reductions on our policies at an appropriate level, getting those future rate actions and not supporting it with our holding company cash. So if that helps, that's our intention at this point. It's to really work hard on making sure that we're shoring up those policies.

We'll take our next question from Tom Gallagher with Evercore.

Just a question on the statutory review. Is there a big difference between statutory and GAAP reserves? And will actuarial guideline 51 have any impact on your results?

Thanks, Tom. I appreciate the question. Let me take the last one, actuarial guideline 51. We think we're completely compliant with that based on how we review our rate action plan right now. So we don't see that impacting our results whatsoever.

Regarding stat and GAAP reserves, there is a difference. There's a couple of difference. GAAP is using your best estimate. And so when we look at our GAAP reserves and our GAAP margin testing, we're using our best estimate assumptions as a part of that. The other difference from a GAAP perspective is we're talking about our margin over and above our deferred acquisition costs balances, which are not a concept you have in stat. And so we've got about $1.3 billion of deferred acquisition costs in long-term care, so you can think of that margin as the amount above that.

Secondly from a stat perspective, there's a different discount rate that's used. It's a statutory rate that's typically lower. And in addition to that, we use a provision for adverse deviation. So it's not your best estimate assumption; it's a moderately adverse scenario that is used to establish that. So hopefully that helps.

That does, Kelly. And are you able to use the offset for adverse claims experience where you're assuming higher future rate increases? Are you able to use that same assumption in stat as you are for GAAP?

Yes. From a Genworth Life Insurance Company perspective in Delaware, we are. And that kind of fits in with actuarial guidelines that have been clarified. On a New York basis, they have different rules, and different rules for applying cash flow testing in general in a variety of different areas. So we're not currently including future -- rate actions into the future on that at this point.

And Tom, it's Tom. I would just add that when we work with the regulators on the premium increases or benefit reductions, the focus is on all the statutory ratios and margins. So we really, in terms of how those premium increases are applied for and approved by regulators, it's all based on the statutory numbers, not on U.S. GAAP.

Got you. And Kelly, can you give the number -- the differential, the GAAP versus the stat reserve today, if you have that.

You know, Tom, I don't have that at my fingertips right here, but it's something we can absolutely provide to the market. So happy to follow up. It's an easy thing to get.

Okay. And then just last question. The unstacking of GLIC and GLAIC, if you don't get approval for that, is that a deal-breaker? Or is there a way to still get this deal done without unstacking?

Yes. So Tom, I would say that both Genworth and Oceanwide believe it's important to unstack GLAIC. Because that -- if we're able to do that, it does create a future -- an additional future dividend stream. So that's really been our goal all along. Obviously, we're in discussions with Delaware. I don't want to get into all the different permutations of that. I think that would hurt Genworth if I were to do that. But I do think all potential options are there, $700 million, a different amount. We're also proceeding without an unstacking. So I think those are all options that we're working on with the regulators. So that's a to be determined where we end up.

Tom, it's Kelly again. I just wanted to mention someone handed me the right piece of paper to look at to give you the LTC reserves. So on a statutory basis, our growth for long-term care reserves including claims reserves, et cetera, is a little over $27 billion. And on a -- and this is as of third quarter, by the way. And then, as of third quarter, our GAAP reserve is about $26.2 billion.

So pretty close, okay. And then final question. The gross changes when you made -- looked at the margin, the $0.5 billion reduction, you mentioned there was an offset from assumed future rate increases. How big of an impact was that?

So Tom, basically what we do every year, we -- when we changed our claim assumption. So in this case, the way I look at it is we were looking at lifetime and nonlifetime business together. We decided -- the actuaries felt there was a different incidence rate, which makes sense. On lifetime claims, our policyholders aren't trying to save their benefit amount, as it's a lifetime. So that we were finding that lifetime claims tend to be earlier. And so as a result of separating them, we raised incidence rates. So the future present value of claims, we didn't really offset that with a reduction on the nonlifetime benefit side.

And so we then use that with -- working with Elena Edwards and team, the team that I mentioned, we then decide how much of that higher claims we're willing to seek to recover in premium increases and we build that into our 5- to 7-year plan. And so the way I look at it, we didn't put into our premium increase plan a 100% offset of that claim amount.

So it's just a partial offset?

Correct.

We'll now take our next question from Peter Troisi with Barclays.

Maybe just a follow-up to Ryan's question from before. Can you remind us if there are any regulatory restrictions on pledging your subsidiaries as collateral on the secured financing that you've mentioned?

Thanks for the question, Peter. It's Kelly. We don't have any regulatory restrictions on pledging any of our ownership positions related to the holdings in our holding company.

Okay. And obviously that would include the equity of your subsidiaries, right?

It would.

Okay, great. And then international MI dividends I think you said were $135 million in '17. How do you think about the run rate of that dividend flow? Do you think it potentially could decline this year given some of the regulatory changes in Canada?

I'll take that, Peter. This is Kevin Schneider. The -- as Kelly mentioned, we believe we're going to begin some dividends coming out of U.S. MI this year. And so that's not international, but that will be an incremental flow to the holding company. Overall, I would say with the current capital levels that Kelly talked about overall in our -- in her prepared remarks, both the Australia and the Canadian companies are operating at very strong capital levels right now. So I think we'll continue to see ordinary dividend flows that are consistent with whatever their ordinary -- their income is.

We also, because of those high capital ratios, have access to extraordinary dividend capacity. And so the businesses are very focused on continuing to optimize their capital and to run efficient capital businesses. We have to wait and see how things evolve, to your question, in Canada to sort of finalize if there's going to be any regulatory changes there in Canada. But longer term, I think we'll have -- we'll continue to have good support from those companies and those businesses, augmented in particular by the opportunity for additional capital from an extraordinary basis. And we then have a pretty good track record of delivering on some of that.

Okay, that makes sense. And then maybe just one follow-up for Kelly. On the 20 point impact to Life RBC in '17, and then the 50 to 60 point potential impact in '18, are those -- do those factor changes to the numerator and denominator of the RBC ratio for GLAIC as well as GLIC?

Yes. Thanks for the question, Peter. That does; that's really our view of what it would be on a holding company basis. So this is assuming no unstacking. It's based on our -- what we're going to report as of year-end 2017, because we still have all the companies stacked. And just to give you an illustrated view, the 50 to 60 was looking at the same structure on a pro forma basis looking at 2017. So hopefully that's helpful.

And what I would add to that is obviously all of the life insurance companies are going to have a change in the RBC calculation, and there's been a lot of disclosure on that by other companies. So I do think the life insurance industry is working with NAIC through the -- and the ACLI is involved working on the RBC calculations and when they'll apply. So all of that is to be determined. I think what we were trying to do like other companies is just show if the factors were changed, what that impact would be based on where we are today. But that's a -- will be developed in terms of how that's going to work and what the time line will be for that, I think we'll be work -- the industry will be working with the NAIC on that.

We'll now take our next question from [Joshua Astrof] with Crédit Suisse.

In light of earlier comments that PMIERs 2.0 could potentially have a significant reduction in the PMIER buffer and the plan to resume dividends out of U.S. MI in 2018, are you concerned about any potential negative rating implications for U.S. MI or negative implications for U.S. market share kind of given a weaker capital position relative to peers?

This is Kevin. I think the -- when you look at our -- the strength of our capital position versus peers, it's pretty strong. We are challenged by the financial strength rating differential that we've been experiencing. But overall, I think this business has got a very strong balance sheet that continues to strengthen. Our statutory risk to capital continues to improve. The strength of our overall PMIER sufficiency ratios at this point in the absolute magnitude and advance our -- in excess of our required assets is very strong. I think everybody's going to be faced with some challenges, if the -- some additional pressure to required capital when the 2.0 is ultimately clarified and published following the comment period.

Our view is that should not interfere with, number one, our dividend plans for next year. We feel that we would be in compliant with 2.0, if and when -- if it came out as we expect at the end of 2018. And the reality is our share is really sort of on a quarter-over-quarter basis over the last 2 to 3 quarters has been relatively stable. We did say we're down a little bit over 4Q '16 to 4Q '17. But the largely I think while we have felt some pressure from our financial strength ratings, we -- that the business has been performing well. And you're going to see us with a loss ratio that I think is sort of sticky compared to the last quarter.

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

Thank you, Kathie, and thanks all of you for your time and questions today. In summary, what I'd say is that 2017 was a pivotal year for Genworth. We delivered strong financial and operating performance, continued our outstanding progress towards achieving our multiyear LTC rate action plan, and we continue to work nonstop towards closing the transaction with Oceanwide. So thank you, again, for your continued interest in Genworth.

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.