Q3 2019 Earnings Call

Good morning, ladies and gentlemen, and welcome to Genworth Financial's third quarter 2019 earnings Conference call My.

My name is Loren and I won't be your coordinator today.

At this time all participants are any listen only mode. We will facilitate a question and answer session toward the end of this conference call.

As a reminder, the conference is being recorded for replay purposes.

Also we ask that you refrain from using cell phones, Speakerphones headsets dream MCU any portion of today's call.

I would now like to turn the presentation over to Tim wins, Vice President Investor Relations Mr. Olin's you May proceed.

Thank you operator, good morning, everyone and thank you for joining Genworth third quarter 2019 earnings call.

Press release in financial supplement were released last night.

This morning, our earnings presentation was posted to our website and will be reference during our call <unk>.

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 or Chief Financial Officer.

Following our prepared comments, we will open up the call for 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.

Actual results may differ materially from such statements.

I need to read the cautionary note regarding forward looking statements at our earnings release and related presentation as well as the risks factors in her most recent annual report on Form 10-K .

Filed with the FCC.

This morning's discussion also includes non-GAAP financial measures that we believe maybe meaningful to investors.

Our financial supplement earnings release and Investor materials.

GAAP measures have been reconciled to GAAP, where required in accordance with FCC rules.

Also when we talk about results for Australia business. Please note that all percentage changes exclude the impact of foreign exchange.

Finally references to statutory results are estimates due the timing of the filing of the statutory statements.

Before I turn the call over to Tom in Kelly as we've previously announced we plan to hold our 2019 annual stockholders meeting on December 12 to comply with the New York Stock Exchange rules.

2019 proxy statement will be filed in the near future.

The event the proposed merger with Oceanwide is completed by December 12, 2019, our 2019 annual stockholder meeting will not be held.

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

Good morning, Thank you for joining todays call.

Almost delivered another strong quarter results generating honor 23 million in adjusted operating income driven by continued momentum in our U.S. mortgage insurance business and solid execution across or other platforms.

These are the underlying strength in capital levels across or mortgage insurance businesses as well as the ongoing progress towards our strategic priorities in the U.S. life insurance businesses, all while we continue to work tirelessly towards closing the transaction with ocean like.

Our long term care insurance smelter, you're right action plan continues to be a significant strategic focus and positive for genworth.

Year to date right action approvals have been strong with fiber 94 million of impacted enforce premiums representing a weighted average premium increase of 43% on the cumulative net present value basis. Since 2012, Genworth has achieved approximately 11.5 billion of approved LTC preneed.

He says.

We continue to see broad base acknowledgement in support of the need for Actuarially justified premium rate increases our long term care insurance policies for most state regulators.

Why was this objective is initiative set forth by the any I see long term care insurance task force to develop a more consistent and timely national approach.

Reviewing long term care insurance premium raise.

This is critical as much of the experience is still just emerging given the age of the industry and policyholders.

I believe the enhanced focus on it's extremely important initiative will significantly improve the future health the long term care insurance industry as well as a successful genworth multiyear rate action plan.

Let me now turn through an update on our ongoing transaction with Ocean wise.

As previously discussed in the absence of substantial progress with Canadian regulators regarding the ocean wide transaction.

More than Oceanwide explore to sell Genworth, Canada to facilitate the completion of the transaction with Oceanwide.

Following a thorough review of potential disposal options, we agreed to the sale of our 57% stake and Genworth, Canada to Brookfield business partners were Brookfield brought total transaction value of 2.4 billion Canadian dollars or roughly 1.8 billion U.S. dollars.

We're extremely pleased that we reached an agreement with Brookfield for stick and Genworth, Canada Brookfield is a highly regarded investor in Canada.

Never going expertise in the insurance and residential real estate sectors.

Look real transaction also satisfies the criteria, we saw when reviewing our disposal options, which includes speed and certainty of execution and price.

To that end since announcing their transaction agreement Brookfield, a genworth, Canada had been in regular discussions with Canadian regulators regarding their review of the transaction.

Last week, we announced that the Canadian regulators are seeking to ensure enhanced data protection of our Canadian customers data during the transitional period. After the closing the sale of our interests are Genworth, Canada, well Genworth continues to provide certain transition services to Genworth, Canada.

As part of the original agreement with Genworth, Canada, when Genworth IPO the business in 2009.

Genworth must provide certain transition services to Genworth, Canada for up to 12 to 18 months. After any celebral majority stake a transition service agreement Auryxia say, it's very common in M&A transactions for the separation of Genworth, Canada. The ongoing services. The Genworth will provide include I.T. infrastructure you've been raised.

Sources, and finance and accounting related to support functions.

Oh sure one in general with expected close the Oceanwide transaction shortly after the Brookdale transaction closes assuming the toddler recede other relevant approvals and clearances. Therefore.

He will be owned by Oceanwide during a good part of the 12 to 18 month transition period.

Canadian regulators are asking Genworth Brookfield engine with Canada to work together to develop a mitigation plan to ensure that the appropriate data protections are in place. During this 12 days the month transition period post closing.

This includes leverage lending spreads Genworth has probably enhanced data security program in our U.S. businesses, which has developed as part of the mitigation plan under the surface review process.

We're currently working as quickly as possible to provide the Canadian regulators with assurances that Canadian customer data will be secure during the transition period.

Yeah, I'm with them Brookfield have received all other required approvals to complete the cell Genworth, Canada and are targeting closing the transaction by the end of 2019.

Following the October 21 election Cat as Liberal party retain control the Canadian government as such we did not expect any significant change and the personnel at the regulatory agencies responsible for our transactions approval and we will continue to work collaboratively with them.

Motion like incentive to the sale Genworth, Canada to Brookfield in connection with their consent Genworth and Oceanwide entered into a 12 waiver and agreement extending the merger agreement deadline to not later than December 31st 2019.

So it wasn't Oceanwide previously received approvals from all necessary U.S. regulators and certain other international jurisdictions. Since then.

Provided updated information regarding the ocean why transaction to reflect the passage of time as well as the Genworth, Canada disposition.

Well regulatory approval from New York expired earlier this year, we're in discussions with the New York Department of financial services to secure an appropriate re approval.

No Genworth performs our annual assumption related margin reviews of LTC life and annuities in the fourth quarter. Each year, we were in the process of conducting this years review and consistent with past practice, we're discussing certain LTC assumptions to be reviewed with our various state regulators based on these discussions.

The New York Department of financial Services has recently requested additional actuarial and LTC premium rate increase information regarding the LTC business in our New York subsidiary Genworth Life Insurance Company of New York or GLICNY.

The New York regulator is assessing the fourth quarter assumption that cash flow testing information for GLICNY concurrently with our consideration of a re approval of the transaction.

We are working with the New York to provide all the necessary information to them. So that they can finish their review to allow for closing of the ocean Microgrids action by the end of the year.

We will continue to manage the fourth quarter actuarial assumption reviews for GLICNY, GLAIC and GLIC and the same manner as we have done in the past because of the potential timing of the Brookfield and Oceanwide transaction closings as well as the work of the NFC Task Force Genworth has engaged with our regulators and discuss these assumption reviews.

Earlier than in past years.

In addition to New York, Fannie Mae Freddie Mac will need to re approve the oceanwide transaction well sell or other regulators are currently reviewing the supplemental information to determine whether it has any impact on their existing approvals.

Name for confirming prior approvals or re approvals.

Dependent in part on the timing of the closing of the Canadian transaction.

Following the receipt of all John with final regulatory approvals Oceanwide will also need to receive clearance from China State administration of foreign exchange or safe.

For the currency conversion and transfer of funds.

Oh sure why has been very patient and co-operative as it works through the Canadian sale process.

Our regulatory approvals a strong testament to their commitment to the Ocean My transaction.

Oh sure also remains committed to the one half billion post closing capital investment plan, which it intends to make a three equal installments subject to the receipt of the required regulatory approvals or clearances.

Based on our target to close the transaction by the end of 2019. The three tranches are expected to be made by the end of the first quarter of 2020, the third quarter 2020, and the first quarter of 2021.

The timing of the tranches as ultimately dependent on the time in the closing of the Ocean why transaction.

I would also like to thank our shareholders and other stakeholders for your patience as we continue to work towards closing the transaction, we fully understand how challenging it has been for our shareholders and other stakeholders given that oceanwide and genworth.

On the merger agreement three years ago.

Our board continues to believe the Oceanwide transaction isn't the best interest of our shareholders and we remain committed to doing everything possible to bring this transaction to a successful conclusion as soon as possible.

At the same time.

It was continues to deliver solid performance and is well positioned to address its upcoming debt maturities given the steps, we've taken to improve or financial flexibility.

Now I will turn the call over to Kelly, who will provide a review of our financial results key drivers of performance as well as discuss our assumption review process and our liquidity in capital positions.

Thanks, Tom and good morning, everyone.

Today, I will cover more de talent on our third quarter financial results in key drivers.

Also discuss capital levels in our businesses and provide updates on cash and flexibility at our holding company.

As noted in our press release quarterly financial supplement release last evening the.

The plan sale and generally Canada has met the requirements for held for sale accounting treatment and has been reported as discontinued operations.

Accordingly, Genworth, Canada financial position results of operations and cash flows have been separately reported and all prior periods have been re presented to reflect that.

These accounting rules also required us to record at an estimated lie in the current period on the planned sale to the extent the estimated net cash proceeds are less than the carrying value in U.S. dollars of the business sold.

Well the purchase price was slightly higher than our equity in our Canadian business is shown on our balance sheet.

Given the exchange rate of the Canadian to U.S. dollar we recorded a lot due mainly to the currency translation differences recorded as a part of accumulated other comprehensive income or AOCI guy that have arisen over time.

The loss from discontinued operations attributable to Genworth shareholders in the quarter was $110 million, reflecting the net estimated sales pricing less cost itself as well as a quarterly results from generally Canada.

The other adjustments included as a part of discontinued operations include the portion of corporate overhead previously allocated to generate Canada interest on the term loan secured by our ownership interest in January Canada, and taxes directly related to the Canadian business.

These impacts are reflected in corporate another quantified in the quarterly financial supplement and the Investor presentation.

Let me now shift to the current quarter's financial performance focusing most of my comment on continuing operations.

We reported net income to general shareholders for the quarter at $18 million.

Income from continuing operations of $128 million.

Adjusted operating income of $123 million.

Our U.S. and Australian mortgage insurance businesses continue to perform well with strong loss ratio performance in the U.S. and solid capital levels, but platform.

I guess life results were mixed driven by continuing good enforce reduction results in long term care insurance offset by accelerated amortization of deferred acquisition cost in life and in unlocking charge due to low interest rates for single premium immediate annuity.

In U.S. Tonight overall results continue to reflect solid fundamentals, including low interest rates.

Steady economic growth low unemployment and stable housing prices.

You have some nice adjusted operating income was $137 million in the corner, which was down $10 million sequentially and up $19 million versus the prior year.

The third quarter reported loss ratio was 11%, which is up 11 points from the prior quarter and flat versus the prior year.

No. That's prior quarters reported loss ratio zero included a reserve factor update which reduce that periods last ratio by five point.

New delinquencies for the quarter were up on a sequential basis, reflecting seasonality and I've been count your over here, but the larger enforce portfolio.

Favorability in that cures and aging did moderate from last quarter driven by seasonal trend.

Primary insurance in force in U.S.M.I. continues to grow reaching all time high of $186 billion at the end of third quarter 2018.

It was up 14% versus last year.

Flex very strong levels of new insurance, written offsetting lower persistency levels, driven by lower mortgage rate increasing refinancing activity.

The U.S. mortgage origination market remained strong and was that versus the prior quarter and prior year from a higher purchase and refinance originations market.

Our flow new insurance, written or and I Debbie for the quarter was $18.9 billion up 20% sequentially and 83% versus the prior year.

Once again, we expect her U.S. and my third quarter 2019 estimated market share to have remained strong.

We continue to manage to an overall return expectation in the mid teens on the 2019 book here.

Moving to Australia.

Plenty business levels were at 27% versus the prior quarter and 32% versus the prior year, primarily from higher mortgage origination volume from certain key customers.

The adjusted operating income was $12 million in the corner, which was down $1 million sequentially and $5 million versus the prior year.

The U.S. GAAP loss ratio in the quarter with 36%.

Two points versus the prior quarter and up to five points versus the prior year, primarily from lower premiums from portfolio seasoning.

On a trailing is afrezza accounting basis.

Loss ratio of 53% in the quarter and the year to date loss ratio of 54% in line with full year 2019 loss ratio expectation of 45% to 55%.

Consistent with prior years in the fourth quarter of 2019, our mortgage insurance business in Australia is expected to complete its annual review of its premium earnings pattern.

Turning to our U.S. life insurance segment in long term care, we made no significant adjustments to assumptions and methodologies to our claims reserves given that our recent experience on our current claims in aggregate was inline with expectations.

Regarding financial performance for the quarter for long term care claim terminations were lower versus the prior quarter, which is generally consistent with seasonal patterns for the second half of the year.

Compared to the prior year claim termination rates were in line.

New long term care claim following the updated utilization assumption after last year's completed claims reserve review.

Can you to reflect higher severity.

Additionally, we are seeing higher claim counts on our larger twice, one and choice to block.

Which we also expect to continue as the blocks age.

The overall financial benefits at the in force rate actions for long term care, particularly the reduced benefit impacts.

Illustrated on page nine at the Investor deck released this morning continue to be strong.

This is primarily related to the large rate increase approvals in 2018 and earlier this year, which are now being implemented.

As we noted last quarter. These rate action approvals included expanded reduced benefit and stable premium options, which are being selected at a higher frequency by our policy holders as many of these policy holders have been subject to multiple rounds of increases.

We expect a meaningful level ever reserve releases from long term care benefit reductions.

He did with the premium rate increases to continue as we go into 2020 and implement the large enforce rate actions cheap in 2018 and 2019.

However, it is difficult to predict policyholder behavior and the level of reduced benefit options may vary from quarter to quarter in the future.

As we discussed on prior calls this year.

As of year end 2018, we estimated that we would achieve approximately $6 billion.

Net present value basis in additional future approved rate actions under actuarial assumptions that were allocated in late 2018.

Our year to date 2019 approvals on a net present value basis.

He did $1 billion of the 6 billion dollar amount.

Our multiyear rate action plan refined last year.

Seemed it will take approximately 10 years to obtain and implement these remaining approval.

We're currently evaluating our actuarial assumptions in connection with our fourth quarter cash flow testing and loss recognition testing or view.

We are particularly focused on updated experience on our twist to and newer policy series that is just developing with more credibility as more policyholders have gone on claim.

Any updates to our assumptions, including our view of long term interest rates will likely increase the future amount of long term care premium rate actions needed.

Choice to with premiums at approximately $970 million annualized represent about 37% of total long term care individual premiums and has an average attained age of between 69 and 70 years old.

For comparison, the average attained age on our oldest block pre P.C.S.P.S. one MPC has to our 88 85 and 80, respectively.

We have a longer runway for collecting additional premiums on choice two and the newer block from LTC rate actions, which allows for smaller and more manageable premium increases for our policy holders, but significantly higher net present value benefit city approved premium increase.

Our nation wide cumulative average rate increases for choice to is approximately 64% versus 200% plus for some of our older legacy products series with some states approving 300% plus on some of the legacy product.

Our actuarial reviews for loss recognition in cash flow testing for long term care and all of our products are still in progress and will be disclosed as a part of our fourth quarter earnings disclosures.

These reviews will consider a number of assumptions.

Polluting expected claim incidents.

Benefit utilization mortality interest rate and enforce rate actions among others.

We are also discussing long term care assumptions with our domicile Erie regulators, Virginia, Delaware and New York during the fourth quarter as our reviews progress as we have done in the past.

Also as Tom noted in his remarks, we did start these discussions earlier this year given the overall timing of the Brookfield Nationwides transaction closing.

Turning to life insurance, our results included $10 million after tax.

Celebrated DAC amortization related to higher ceded reinsurance rates.

Overall mortality in life for the quarter was lower sequentially and versus last year.

As we discussed last quarter. The term life business continues to be negatively impacted from higher lapses, primarily associated with the large 20 your level premium term life insurance blocks written in 1999 in 2000 entering their post level premium period.

The accelerated term life insurance DAC amortization, a noncash impact primarily related to these term life lapses reduced earnings by $38 million, which is an additional $6 million after tax versus last quarter.

We expect amortization to remain elevated throughout 2019 and 2020 as more of this business enters the post level premium period and lapses accelerate.

As we are finalizing our review of assumptions on her life business, we're focusing on interest rates given the significant decline of around 100 basis points on the tenure Treasury between December 2018, and the end of third quarter 2019.

We are currently analyzing all of our mortality persistency and interest rate assumptions and most other than interest rates are largely in line with per your assumptions when taken as a whole.

I will share some perspectives on how the interest rate environment impacts are different business lines and include a sensitivity related to universal life in a few moments.

And our fixed annuity products, which have lower variable investment income higher reserves due to lower interest rates versus the prior quarter.

We had an after tax loss recognition charge at $13 million during the quarter related to single premium immediate annuities also driven by the significant decline in interest rates.

Our single premium immediate annuities are tested for loss recognition quarterly given that there is no margin in this interest rate environment.

Our adjusted operating loss in corporate and other which has been restated in prior periods as I discussed earlier was $35 million for the quarter.

This was improved versus last quarter, due primarily to favorable tax timing and other tax adjustments of approximately $12 million and lower expenses.

We anticipate a benefit from tax timing, a $4 million to occur in the fourth quarter.

Now turning to capital levels are U.S. and Australian mortgage insurance businesses continued to maintain very strong capital position.

In U.S. a mine we finished the quarter with a p. Myers sufficiency ratio of 129%.

From 123% last quarter on strong cash flows and the execution of an excess of loss reinsurance transaction on a portion of the last year for the 2019 book here during the quarter.

The pmires sufficiency level increased to over $850 million above the level of acquired assets as of September Thirtyth 2018.

As noted in our press release, we received at $250 million ordinary dividend from U.S. am I in October .

We expect U.S. am I to be able to pay an annual dividend going forward based on our current plans, which assume favorable trends and performance continue within the business as well as macroeconomic factors such as a strong U.S. housing market unemployment levels and strength in the overall.

The U.S. economy.

As we look forward, we will assess the appropriate amount and timing of future dividends based on a variety of factors, including economic factors regulatory constraints business performance and we will also consider the as you might transaction and related capital plan.

Our Australia in my business ended the quarter with an estimated capital ratio of 198%.

Down from 208% last quarter, which is in excess at 475 million Australian dollars above the high end of the prescribed capital amount or PC, a management target range of 132% to 144%.

The decrease in Australia as capital ratio, primarily reflected dividends paid during the quarter.

To further optimize its capital position and to bring the PPA closer to management's target range.

Sterling business after receiving approval from its like a regulator apropos today declared a special dividend of 24.2 cents per share for an aggregate amount at approximately 100 million Australian dollars.

The dividend is payable at the end of November and the Genworth holding company will receive approximately 34 million.

Dollars on a U.S. dollar basis based on or 52% ownership percentage and the current foreign exchange rate.

Then like Canada Special dividend announced in early September was paid on October 11, with net proceeds to the holding company, a $36 million and $15 million to you I am I.

The special dividend proceeds will reduce the previously disclosed net proceeds from the Brookfield transaction of approximately $1.8 billion by a similar amount given the fixed price agreement that is adjusted for any special dividends paid.

We expect capital and Genworth life insurance company or GLIC to in the third quarter at approximately 200% of company action level risk based capital, which is up slightly from the second quarter.

U.S. life statutory income in the corner with positive benefiting from earnings and long term care from enforce rate actions and in fixed annuities.

This statutory profitability offsets the required capital increase in variable annuity from lower interest rates and in long term care from continued claims development.

I want to remind investors that as a part of our earlier agreement with Delaware regarding the S. My transaction Genworth will contribute $175 million too quick.

Its contribution to glass is a special commitment made as a part of the Delaware approval process and in conjunction with the proposed transaction with national wide.

It is our intention to manage all of our U.S. life entities on a standalone basis with no other future plans 10 piece capital in these businesses more extract dividends.

You S. life businesses will rely on their consolidated statutory capital of approximately $2 billion, which did increased slightly during the quarter.

Prudent management of enforced block and the Actuarially justified rate actions to satisfy policyholder obligations.

Moving to the holding company, we ended the quarter with $366 million in cash and liquid assets down from $403 million from the prior quarter.

During the quarter total net dividends to the holding company for $62 million, which included proceeds from share repurchases.

Intercompany tax payments of $6 million continued to be a source of cash to be holding company.

Offsetting these inflows were interest payments, a $72 million additional cash collateral of $23 million, primarily on our hybrid debt interest rate swaps and $10 million and other miscellaneous items.

We expect our fourth quarter cash position to benefit from U.S. semis dividend of $250 million candidates special dividend $36 million, and Australia's announced special dividend of $34 million.

We do have an option to execute on Brookfields bridge loan if the Canada sale has not been approved by regulators by tomorrow.

We will continue to assess progress with the Canadian regulators and the overall is from ideal to determine whether we draw on these funds at an appropriate time.

Now I want to cover topic that many investors and most insurers are watching carefully.

Which is the recent drop and long term interest rates and expectations for how long these low rates may persist.

During the quarter, we saw the tenure treasury fall from 2% at the end of the second quarter two 1.68% at the end of third quarter and fall further into early October only to rebound since then to around 1.8% last week.

Genworth is somewhat unique and the insurance industry, given our mix of businesses as we have some businesses the benefit from low rates, while others are negatively impacted.

And our U.S. mortgage insurance business low interest rates positively impacting your business levels.

Through an expanded originations market, while some of this benefit maybe offset by lower levels of persistency and investment income.

In our U.S. life business lower rates are generally negative impact the business in multiple ways. Both in the current period as we saw this be unlocking charge this quarter and in future periods with lower investment income on our fixed income portfolio.

We also incorporate our view of future interest rates in our other actuarial assumption updates that we're currently in the process of completing related to our universal life products. If interest rates stayed at near their September thirtyth levels. It could accelerate our DAC amortization by between 100 100.

50 million before taxes.

This amount does not incorporate any other assumption changes or offset.

We will update you once our process is complete in connection with announcing our fourth quarter results.

We've disclosed some of our other discrete interest rate sensitivity is in our annual 10-K, which I encourage investors to review.

We will continue to closely monitored the low rate environment as we move forward.

In closing it was a strong financial quarter for Genworth, we remain focused on closing or sell of Genworth, Canada Brookfield, and then completing oceanwide transaction is seen as possible.

Operationally, our mortgage insurance businesses continued to execute on their priorities and are performing very well financially with solid earnings strong capital levels and significant dividends to the holding company.

We remain focused on the operational progress, including our LTC rate action plan and other strategic actions intended to improve and help stabilize or U.S. life insurance businesses.

With that let's open it up for questions.

Ladies and gentlemen, well now begin the Q and a portion of the call.

As a reminder, please refrain from using cell phones speaker phones for headsets.

Press Star one to ask a question.

If at any time. Your question has already been answered or you would like to withdraw. Your question. Please press star to to be reveal from the Q.

Please press star one now.

Well take our first question from Ryan Krueger with KBW brokerage.

Hi, good morning.

In terms of the re approvals that you need is does that include Sip, yes, <unk> and are you having any do you need to have any additional interactions with them.

Ryan Good question comes up a lot we do not need any further approvals from surface. They approve the deal given that there were comfortable with the mitigation plan and there are only national security.

<unk> issue was on protecting the U.S. customers individual customers proprietary information and there were satisfy the mitigation plan does that so from that perspective. We're Cvs has completed a overview and has no objections are that remains the case.

Thanks, and then for Kelly on your comments around choice to I guess.

It can you give any more detail there are you.

Claims data is coming in that it's developing negatively but that you believe that can be offset by future premium rate increases.

Yeah, that's a great question, Ryan and good morning.

When we look at our choice to block and you know like I mentioned in my prepared remarks, the average age of that policy holders like between 69 and 70 I think it's like 69.6.

We had about 11000 total claims of those 11000 total claims about 5000 at those policyholders are still on claims so we're definitely watching this experience.

Because we've had different underwriting for those blocks of business, we have expected their experience to be better, which we've seen it just is trending incidence is trending a little bit higher than our expectation for some of the older age is particularly that the 75 and above age is why while it's a little bit better or for that but.

Let us 75, a year old so we do anticipate being able to we have very few rate actions on the choice to block and newer blocks. Since then so we're currently evaluating that on a state by state basis, and would anticipate that we could offset much of it out with rate increases, but the work still underway.

Okay. I appreciate the question Ryan I would just Kelly's comments I agree with what you said.

We have had a number of conversations and I'll give them presentations to the NFC task force that we've talked about and one of the things that I have noted to them is for choice to and the newer blocks. While its arguable do is 11000 claims on 400000 lives statistically significant or not one of.

Thanks.

They've learned and we've learned over the last many years is applying for premium increases sooner is better for policyholders because the overall increase is less it if you go sooner, but as you collect more premiums a along along the way it's better for the regulators because they ultimately off to approve.

A lower ultimate premium increases and Kelly gave you the statistics. The the you know the average premium increase on some of the older blocks is 200% a you know on our PC S. One block for example, 20 states have given us more than 30%, including nine or the top 20 states. So I do think.

Given those very high premiums there there is a view of this a an assay test force in general.

Going sooner to get premium increases a better than than waiting. So I think the advantage on a choice to that we have and then killing mid point is we think it's better for policyholder busy all to improve increases lower and then for every premium dollar approved because we're collecting it.

Over.

A longer period of time, given the younger age of the choices to policyholders.

Yeah, that's about it it's better for us and so I do think the NFC task force and <unk> and we budget at a number of times over last several calls I think it's it's critically important and I do think generally a that task force, which is composed of 36 states and 36 commissioners and there's an actuarial actuarial subgroup.

We're also working with a composed of I think it's 10 actuaries led by the Minnesota, Chief Actuary and so I do think both the the regulatory community DNA I see as well as all the insurance companies. After these blocks are making progress given all that we've learned over the last a five or six.

Sure.

Yes, I'm, Tom mentioned at random when Tom mentioned that 30% on piece, yes, one I am thinking about 300% <unk> yeah.

Got it.

Our next question comes from Jimmy Bhullar with JP Morgan.

Hi, good morning, So a couple of questions first on the.

Canadian approval process, how are your conversations or sort of lack of conversations with the regulators different now than the first go around when you were trying to include the Canadian business as part of the sale to Ocean light.

And then I have another one but.

Pardon me I think that's a good Jimmy that's a good question, yes, we really did not have much.

[laughter] previously.

Oh.

Before we announced the sale to Brookfield I think.

I see in the other regulators have a very positive view of Brookfield and Brookfield lives you acquire or are they also have a positive view of our Genworth, Canada, Canada businesses. So we are having much more detailed conversations yen and as a both Kelly and I mentioned under our the original.

IPO shareholders agreement Genworth, the apparent agreed to provide.

Certain transition services to the extent, we sold our majority stake.

So were ongoing that commitment.

You know us be is working with Brookfield, John Wick, Genworth, Canada, and Kevin side I'll, maybe ask Kevin that makes comment is leading that process from from Genworths perspective, but I think it's it's going well I think I see has a favorable view of both Brookfield and Genworth, Canada they've been regulating.

Both both entities for for quite some time, so I do think it's a very different.

More engaged a discussion between the regulators cabin you work on that daily do you have anything you want to add to.

Thank you I think you characterize it well, Tom we're and constructive dialogue.

And are working to try and solve any concerns.

Related to the transition service agreement periods and Oh, we're encouraged that.

It will be able to work through that.

And then on the long term care business, you've had a couple of quarters, a pretty good earnings and that business I think it and obviously the results are benefiting from the price hikes.

To what extent are the price hikes driving the better margins are worse is maybe just better experience because I think dire doesn't last two quarters you'd had losses for out of the last five quarters. So how much of this is just like.

Like a positive aberration and claims trends.

Where says maybe good benefit of price like starting to flow through.

Give me another great <unk> question I I would say one thing I I don't think that the market gives genworth enough credit for you know we've achieved down and not present value 11, I have billion Oh for me so since 2012.

Pretty substantial I would say that in 2018 and in the first half of 2019, we received very substantial in some cases over 100% approvals from our top 10 states and those are those approvals are now being implemented and you know there are implemented.

On the policy anniversary date, so would it take.

Take several.

Years for all those to come through Kelly I also mentioned this in her remarks, we are seeing now that this is the third fourth fifth round of premium increases, particularly on the older books of business a number of policyholders, who may have taken the full premium increase earlier are now take.

More reduced benefit options and those reduced benefit options are clearly are significantly helpful. From an earnings perspective, because instead of you know they take the full premium increase we get the benefit of that over the long run if they take a reduced benefit its you know the net present values higher and that contributes.

So the earnings so I do think Kelly mentioned this asset for the balance of 19 into 2020, I think those very large premium increases.

With a top 10 states and we're talking about large increases on about 30% of the overall enforced premiums I think you will see that that benefit going forward now obviously offsetting that is we are saying a higher claims.

And we've we've obviously made some assumption changes that go the other way so all of that as a balanced but I do think that the benefits of these significant increases and particularly given that it's the third fourth or fifth from where you know the reduced benefits you go back.

To 14 or 15.

About 90% other policyholders, we're taking a the full premium increase today, it's about 70 or 71%. If you do cumulatively. So I think that that's just done you know a signal is provided us a significant benefit to earnings and I think we'll we'll see that continue and were.

We're still hoping to apply for significant additional premium increases, particularly on the choice to a newer blocks I don't tell if you want to add anything to that.

Just one point I would say they give you a a sensor that metrics around that when we first we're implementing rate action. So, let's say 2012 through 2016 about 90% of the policy holders, where we're paying the full premium increase and you know maybe 6% to 7% we're doing reduced benefits in threed.

Before we are taking nonforfeiture option and that really has shifted if we look at our cumulative metrics to date.

Those that have always paid the full increase or down to 70 ish percent around 71%.

Reduced benefits is about 20 and Nonforfeiture option. It's about nine so that definitely has been driving at as people have seen their policies increase and really have to just rationalize the coverage that they've got compared to the premiums that they're paying.

Okay. Thank you.

Our next question comes from Tom Gallagher with Evercore ISI.

Good morning first first question is can you on pack the increased severity and long term care claims you're seeing meaning is that coming from longer claim durations or is that larger claim amounts and all showed the increased severity you saw it is.

That is the increase pretty consistent with prior years, you or has that been accelerating.

It's a great question time, I'll take that really I think you know and I know you had talked to the team briefly last night as well, but as we're looking at increased severity. It really the function of our assumption update last year in 2018. So every new claim that goes on the books is going on adding.

In assumed amount that's higher than we had previously put out so really it's just a function of the assumption change we made last year the expectation for the average claim depending on a lot of different factors, you know, including what their daily benefit as and each claim just happens to increase the severity.

Due to that math.

The thing I would say as as we see people with higher daily benefit amounts go on claim those claims will be higher because we see that people do try to maximize some of those benefits as they're going on claim and that's one of the reasons. We do focus on reduced on if that option. So that we aligned our claims experience with with the policy holders and they have an incentive to.

To conserve benefits when they can when it's helpful for them.

And and Kelly's It is it fair to say, though you're not seeing.

Yeah, and acceleration of a claim severity, meaning it's getting worse it's more.

Paul It sounds like it's more the model adjustment flowing through.

That's a real fair characterization I view it as the model adjustment coming through and we've actually had a little bit of favorability frankly on the IB NR incurred but not reported as weve true that up on a quarterly basis. So from my perspective that leads me to believe that it's it's really just the model adjustment.

Okay and then the comments that you made on the and why DFS. It sounded like there's more involvement there having in the actuarial review. This year can you can you expand a bit on on what's going on there.

Thomas a it's a good question, it's always difficult to you know answer those questions. Because you know we're being careful I think the all the regulators assume that our discussions are being done in private as we're negotiating so so I have I'm, a little bit limited, but but I would say we've always had good dialogue.

With New York I think New York is aware that as we've given them an update on choice to and the newer blocks and and in some of the issues around severity on the older blocks were.

Going through all of that they obviously.

We Oh, we assumed.

That.

Just because of timing and given the Brookfield sale that we didn't expect we'd have to sell Canada. So that has obviously delay the timeline. So we we knew we were going to run into a concurrently they were reviewing the re approval because their approval expired and we were gonna be going.

Through the fourth quarter review, so I would add also and I think I said this in my remarks.

We're having a lot more dialogue regular dialogues with this and as he task force through six measures no new York's not on that but we're just having a lot more conversations a day in day out with all the regulators on all of this and so I would say Oh, we're talking earlier to New York and the other regulators a because.

Because of all these.

Reviews that are being done at DNA I see level and I do think New York has a better understanding of their blocks. Obviously, New York is a different situation GLICNY versus click looks 49 states evolve GLICNY. It's only in New York. So, it's it's actually a little bit easier to to talk to New York, but part of this review is.

What what are the assumptions that Kelly and I and the team or considering making how to if we make any of those assumption changes how does that impact premium increases, particularly in new York's case, the premium increases that New York would have to approve so I.

I think it's good discussions a it's a negotiation process I can't get until you know more specifics than that because you know a I think it'll be unfair that regulators for me to go out in front of the discussions, but hopefully that gives you a sense that these are.

Ongoing dialogues, there's much more discussion I think there's much more openness on the part of regulators to grant increases today than there were so all of that is good but nevertheless, yeah. We're gonna have to go through the next month or so with New York, finishing up the process with them. So we hope to still close.

Ocean water genworth to close the mix sale or the sale of General Canada, and then the Oceanwide transaction close by the end of the year, that's still our objective and we've you know we think we have a shot at doing that.

Okay. Thanks, Tom and just one final one if I could be.

Maybe maybe related to your last.

Comment about the anyway, I see but the our understanding is regulators are spending more time focused on the baseline morbidity assumptions that from some of that.

Information they've gotten from AG 51 disclosures is that how have you had discussions with regulators on that topic and door.

Would you is that is that a key part of the model that you think might be potentially changed with your 2019 actuarial review.

So Tom another another good question.

There's a sense I think by.

The market and maybe the analyst community that this morbidity review is a new development, it's really not I mean, we we actually had a morbidity improvement I would say less conservative and 2013 and 14 in 2014, we made significant.

Changes on morbidity we.

We significantly shortened the years that morbidity improving it applies.

From I think a 14, we went from 30 years, the 10 years, but we still believe that are specific data Oh, we now have paid to about 280000 claims so on those 280000 claims.

We believe our morbidity assumption, which you know we disclose and it's been picked up by number of outside.

Reporting parties, including the rating agencies.

We assume 1.6% morbidity improvement for 10 years, it's less it's more conservative on statutory because of the statutory pads or provisions for adverse deviation. So for statutory its the assumption is more conservative than that but our 40 year track record justify.

Hi, guys, the those assumptions and so while we're looking at this is part of the review and I don't want to get ahead of the ER Kelly and myself the team, making the final decisions on that but I would for us for Genworth, given our track record I would say that the morbidity assumption.

And that we have is supported by our claims data that may or may not be the case or other parties. So other parties are making different decisions, but clearly that and you made the point Tom It is correct that the M&A I see.

And the states given Agee 51, which as you know the general in a C provision related to how you're supposed to conduct these actuarial reviews.

Under age 51 that is one area that they look out we believe we have we have pretty strong.

To supporting at this point the assumptions, we make a morbidity improvement.

Okay. Thanks, Tom and just to clarify I was referring more or less show to the improvement a assumption embedded in the morbidity assumption more on the actual baseline assumption itself, which I understand. This is is the new were part of the development because I think last year that was much more emphasis on.

Whether there's improvement embedded in the assumption I think now it's actually on the baseline assumption itself I'm, sorry, I don't know just wanted to clarify that point I I think Tom it's both that's both the baseline as well as what you're assuming from morbidity improvement there are competitors.

Who have changed and there are one or two that eliminated morbidity improvement and so because they did it the regulators and he and I see would naturally ask all of us what our view is but we.

Because of the <unk> you know the size of our book. The fact that we've paid 280000 claims in the last four years about <unk> billion of claim payments, we do have probably more actuarial claim information that others do so you know we do believe that our experience supply.

For the both the baseline in the morbidity improvement assumptions that we may.

Great. Thank you.

Ladies and gentlemen, we have time for one final question from Geoffrey Dunn with Dowling and partners.

Thanks, Good morning could you talk a little bit about the and I w. trends in the U.S. semi business. This year, you've had a resurgence in market share obviously shift to risk based pricing, what I guess talk a little bit about your your kind of market recovery. This year and then in particular for this quarter.

Did the industry seem to have an unusual penetration level of rifai versus previous periods.

Yeah, Jeff coming out.

I'll start with the last portion of that question.

Penetration levels were up significantly I would say for reason, we for the industry and I think part of that did there was some significant improvement in the traditional refinanced penetration levels and I think what we're seeing is some of the loans that are being refinanced our more recent loans.

So there are newer loans have been and they haven't had the opportunity to amortize or pay down.

To the levels of some of the older books, where we've experienced refinancing before so so yeah. Those that those re refinancing penetration levels were absolutely up on the quarter.

For the U.S. of my business, we feel pretty good about our sharp its position, particularly in in light of our ratings I think it's a result of our.

You know the combined success of our customer facing value propositions that we're delivering to our customers.

We're we're really been focusing on.

Differentiating our underwriting service levels.

Overall, I think we've got strong relationships and we have been competitive from a pricing guidelines standpoint, with the rest of the industry or the market continues to be a competitive market.

But our and our share is you know influenced by those overall go to market strategies that include both our our our recent roll out of our risk based pricing engine generate as well as ongoing selective participation in some forward commitment transactions I think into in the third quarter.

Based upon you know I can't really call where share is in the third quarter based upon the.

The releases.

Three competitors, including Genworth that have a good of reported so far because but it does look we have a pretty big market and we'll have to see when the balance of the industry reports to see where share levels overall sort out, but we feel pretty good about ours and Uh huh.

And and I think where were you other place we're winning as I think we've got we've got a strong balance sheet and that business. The P. Myers levels are quite strong and at the end of the day, our customers are reacting to the strikes about that capital level.

And in previous quarters, I think other companies come in at Harris is bad competitive, but still fairly rational would you still think that's fair.

Overall, yes, I do believe that's fair as because I think cowie announced on the call, we're still targeting and achieving mid term routine through our.

Mid term me.

Good.

Mid mid teen returns excuse me, that's a that's a tongue twister I'm on that which we've written this year, but I think overall the market is fairly rational but it it's competitive you got to fight everyday to when your share.

Okay. Thanks.

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

Thank you very much Lauren and thanks to all of you for your time and questions. Today I think you you asked Oh.

Very good questions and of course, we appreciate your continued investment interest in Genworth your patience as we're going through this.

Deal process with both the sale of Genworth, Canada, Brookfield and on the overall transaction with Oceanwide. So we appreciate.

Ah you are working with us as we would hopefully get all those gone by the end of the year.

Which is our objective and we you know we think we're in good shape to do that.

Have a great day.

Ladies and gentlemen, this concludes Genworth Financial's third quarter earnings Conference call. Thank you for your participation at this time, the Paul will and.