Genworth Financial Inc

NYSE:GNW

Earnings Call Transcript 2018-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to Genworth Financial's Second Quarter 2018 Earnings Conference Call. My name is Savannah, and I will be your coordinator today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this conference call. As a reminder, the conference is being recorded for replay purposes. Also, we ask that you refrain from using cell phones, speaker phones or headsets during the Q&A portion of today's call.

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

[Tim Owens, Genworth Financial, Inc.]

Thank you, operator. Good morning, everyone, and thank you for joining Genworth's second quarter 2018 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 of our most recent Annual Report on Form 10-K as filed with the SEC. This morning's discussion also includes non-GAAP financial measures that we believe may be meaningful to investors. In our financial supplement, earnings release and investor materials, non-GAAP measures have been reconciled to GAAP where required in accordance with SEC rules. Also when we talk about 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.

[Thomas J. McInerney, Genworth Financial, Inc.]

Good morning and thank you for joining today's earnings call. Today, I will review key highlights from our strong second quarter financial results and briefly recap the progress we made towards closing the pending transaction with Oceanwide. I will then turn the call over to Kelly to provide more details on this quarter's financial results and the proposed Oceanwide capital plan. Following our prepared remarks, we'll open the call to questions.

Genworth delivered another strong set of quarterly results generating $200 million in adjusted operating income or $0.40 per diluted share. Our Mortgage Insurance businesses continue to drive earnings with strong growth across our global businesses while our U.S. Life Insurance business also delivered higher earnings year-over-year and sequentially driven by favorable fixed annuity performance.

Starting with U.S. MI, second quarter adjusted operating income increased 51% year-over-year to $137 million driven by insurance in force growth, favorable loss performance and benefits from a lower tax rate. U.S. MI's capital position remained strong primarily due to positive cash flows ending the quarter with over $700 million in capital above PMIERs requirements.

As a result of its enhanced financial performance and capital levels the U.S. MI business paid a $50 million ordinary dividend during the quarter. In Canada, adjusted operating income increased year-over-year to $46 million while its loss performance remained favorable. Canada's capital levels also remained strong staying well above minimum requirements due to continued in force profitability. And in Australia operating income increased 83% year-over-year to $22 million with higher earned premiums in the quarter primarily due to the updated premiums earnings curve pattern that was implemented in the fourth quarter of 2017. Our U.S. Life Insurance segment delivered operating earnings of $57 million up 46% year-over-year primarily driven by favorable mortality benefiting both the long-term care insurance and annuity businesses.

We also continue to make progress towards our long-term care insurance rate action plan. As shown on slide 10 of the earnings presentation, this rate action plan is performing in line with our expectations and is on track to deliver significant future cash flow to Genworth helping to cover higher claims. In the second quarter, we received 22 state filing approvals impacting a $160 million of in force premiums. We also began submitting new filings during the quarter, which reflected the assumptions we included in our fourth quarter 2017 active life reserve review.

Let me now turn to review of the progress made towards completing the Oceanwide transaction. In June, Genworth and Oceanwide announced that the Committee on Foreign Investment in the United States or CFIUS had completed its review and concluded that there were no unresolved national security concerns with respect to the proposed transaction. We are extremely pleased with the outcome of our team's hard work and commitment to developing a risk mitigation plan that was acceptable to CFIUS.

One of the conditions of the mitigation agreement requires Genworth to engage a U.S. based third-party service provider to manage and protect the personal data of Genworth U.S. policy holders. Genworth is in the midst of implementing this plan, which will be in place by transaction close. Details of the mitigation agreement were provided to our state insurance and certain other regulators as part of their review of the transaction. We also delivered updated financial and other information to our regulators to reflect that the parties are now pursuing the unstacking of GLAIC from GLIC and to refresh outdated information due to the passage of time from when they were first submitted. While we're working as quickly as we can to secure the necessary approvals to close, our regulators have a significant amount of updated and new information to review, which we are continuing to provide as requested. In order to allow more time for regulatory reviews, Genworth and Oceanwide extended the period for termination rights, under the merger agreement to August 15, 2018.

Given our timelines for certain review periods, we expect the regulatory review process to extend beyond this date. In addition to the regulatory review processes, Oceanwide and Genworth are working to finalize the new capital investment plan whereby Oceanwide will contribute an aggregate of $1.5 billion to Genworth over time following the closing of the transaction.

We anticipate that this capital will come in overtime after closing with the final amount of the plan to be contributed by March 31, 2020. As I have said previously, this level of capital commitment will bring our financial leverage to a more sustainable level, and we believe dividends and cash flow from the Mortgage Insurance platforms would be sufficient to comfortably service our remaining debt.

We also believe our reduction of debt will improve Genworth's ratings over time. A key long-term priority for Genworth and critical to Genworth's long-term success. We expect to finalize the details of this plan with Oceanwide in the near future. I am very pleased with the progress, we've made towards closing their transaction over the past few months. Oceanwide and Genworth remain fully committed to satisfying all closing conditions. We continue to believe that the sale of Genworth to Oceanwide is the best path forward for our stockholders. Notwithstanding the current geopolitical environment, we are currently targeting closing the transaction in the fourth quarter of 2018.

Now, I will turn the call over to Kelly, who will review the quarter in more detail.

[Kelly L. Groh, Genworth Financial, Inc.]

Thanks, Tom, and good morning, everyone. Today, I will cover our second quarter results and the key drivers, updates around cash at our holding company after fully redeeming our May 2018 debt maturity and provide some context around our capital plan with Oceanwide, as we work towards finalization.

Let's begin with this quarter's financial performance. We reported net income for the quarter of $190 million and adjusted operating income of $200 million. Our overall results continue to reflect very strong last performance in our U.S. and Canadian Mortgage Insurance businesses. Our U.S. Life Insurance business results were improved overall from last quarter with continued strong fixed annuity performance and significant improvement in long term care insurance results and modest improvement in our life insurance income.

Our overall results continue to benefit from lower tax rates from the 2017 Tax Cuts and Jobs Act, which lowered our overall effective tax rate. As interpretations and calculations of the enacted law are being refined, we continue to evaluate our tax positions and did record a $19 million negative adjustment to the valuation of our deferred foreign taxes. I'll discuss the tax developments and benefits in a few minutes.

Moving to our underwriting results for the quarter, we saw solid loss performance across all of our Mortgage Insurance businesses reflecting steady economic growth, low unemployment levels and favorable housing trends in most regions. In U.S. MI, our second quarter reported loss ratio was a negative 8%, which is down 17 points from the prior quarter and 10 points from the prior year. We did have a reserve factor update of $22 million after-tax after determining favorable trends in frequency and severity are sustainable with the backdrop of a very strong U.S. housing fundamentals. This was the result of developments we've seen over the last 12 months, as our last reserve factor update was in the second quarter of 2017. The second quarter loss ratio excluding this reserve factor update would have been 7%, which compares favorably to prior periods with lower new delinquencies and favorable aging and continued strong cure performance.

We continue to track the incremental losses from last year's hurricanes and believe these delinquencies continue to cure consistent with what we have reserved. Persistency remains elevated reflecting higher interest rates, which reduce refinancing driven lapses. In our U.S. MI business, the lower U.S. tax rate did improve earnings by approximately $24 million in the quarter versus last year's rate. Given the benefits of tax reform and assuming the strong underlying macroeconomic fundamentals in the U.S. housing market continue, we anticipate our earnings in U.S. MI to continue to exceed our 2017 results.

New Insurance Written or NIW was $11.4 billion up 27% sequentially primarily from a seasonally larger purchase origination market; although, partially offset by lower refinancing originations. NIW was up 16% versus the prior year also from a larger purchase origination market partially offset by lower refinancings. Our mix of singles declined sequentially as well as versus the prior year due to our continued selective participation in the market. We continue to monitor our market share given our lower ratings than our competitors, the transaction uncertainty with Oceanwide and some recently increased customer concentration. We are pleased that our strong capital levels and differentiated service and product offerings have served to mitigate some of this pressure although we do expect our overall market share to be modestly lower versus the prior period.

Turning to Canada, the businesses loss ratio increased 2 points from the prior quarter to 15% primarily reflecting a modest increase in new delinquencies, net of cures, in Alberta. Based on the strong business fundamentals, actual loss performance in the first half of the year and expectations for the remainder of 2018, we expect continued strong business performance and Canada has revised their full-year loss ratio expectations from 15% to 25% to a range of 10% to 20%.

The territorial changes made with U.S. tax reform benefited Genworth's share of Canada's earnings by approximately $5 million versus the prior year as the segment effective tax rate of approximately 27% now more closely reflects the Canadian corporate tax rate. Flow NIW in Canada increased 52% sequentially from a seasonally larger origination market, although, was down 5% versus the prior year due to a smaller origination market driven by some of the recent regulatory changes.

Moving to Australia, the loss ratio in the quarter was 28%, down 2 points versus the prior quarter and 6 points versus the prior year mostly as a result of higher earned premiums. Losses were flat compared to the prior quarter and up modestly versus the prior year from a $6 million pre-tax total GMA non-reinsurance recovery benefit recorded in 2Q, 2017. Premiums were up sequentially driven by higher policy cancellations due to an initiative to more promptly identify loans that have been discharged. This positively impacted Genworth's portion of adjusted operating income by approximately $4 million in the quarter.

As a reminder, our Australia business completed a review of its premium earnings pattern in the fourth quarter of 2017 resulting in a cumulative adjustment of the unearned premium reserve that was applied retrospectively for U.S. GAAP accounting. The U.S. GAAP treatment of the Australia earnings curve adjustment is different than IFRS in Australia, which adjusted the earnings curve prospectively versus retrospectively. This results in differences in earned premiums, loss ratio metrics and earnings when the business reports locally. Our Flow New business levels in Australia were up 12% versus the prior quarter due to seasonally larger origination market size and down 12% versus the prior year from lower market penetration from certain lenders as well as continued regulatory changes focused on lending standards, investment lending and serviceability.

Moving to our U.S. Life Insurance segment, our second quarter results generally reflected elevated mortality, which benefited our annuity and long term care insurance businesses. In our LTC business, we did see favorable claims experience in aggregate, higher earnings from the acquired block and higher variable investment income particularly from limited partnerships and Treasury Inflation Protected Securities or TIPS. The benefit from seasonally higher claim terminations in the first half of the year is being partially muted by higher overall benefit payments than we expected. This is being driven by policyholders that are utilizing more of their daily benefits resulting in unfavorable benefit utilization experience. We continue to monitor the elevated benefit utilization levels as claims continue to develop.

Additionally, our LTC business is seeing growth in new claims frequency and higher average reserves per new claim as we see a larger mix of the growing claim population coming from blocks with higher daily benefits. Earnings on our acquired block were up sequentially as the quarterly new claim and termination experience true-up reflected the seasonably favorable results from the prior quarter. We expect quarterly LTC results for the remainder of 2018 to be pressured by less favorable claim termination rates, benefit utilization trends, and new claims as the blocks continue to age.

The claims utilization development of policyholders using more of their daily benefits than previously expected will likely impact claims reserves. However, the work on this assumption as well as other assumptions is not yet complete and we plan to finish this work in the third or fourth quarter. Accordingly, we will not have an estimate of any impact on the claims reserves until the work is finalized.

We have seen very good results on our multiyear in force rate action plan and most regulators have been approving actuarially justified rate action requests. These approvals have been in line with assumptions used in our last year's margin testing and this will continue to be a focus of ours to help mitigate margin pressure.

Turning to Life Insurance. Universal Life and term UL mortality continues to be unfavorable although we did see modest improvement in term life mortality. We plan to review any required life assumption updates later this year, as we have done on an annual basis as experience develops. The term life business also continues to be impacted from higher lapses primarily associated with large 15-year and 20-year term life insurance blocks entering their post-level premium periods, which results in lower premiums and accelerated amortization of deferred acquisition costs.

We expect this trend during the policy shock year to continue to reduce after-tax results by approximately $5 to $6 million per quarter during the remainder of 2018, and then further reduce earnings in 2019, as the larger 20 year blocks written in the late 1990s, reached the end of their level premium period.

In our fixed annuity products sequentially, we saw favorable variable investment income, which was partially offset with less favorable mortality. Results were improved versus the prior year reflecting more favorable mortality, a lower tax rate and the non-recurrence of a $10 million after-tax loss recognition charge in 2Q 2017 related to single-premium immediate annuities mainly from lower interest rates.

Our loss in the Corporate and Other segment was higher than prior periods mainly due to the $19 million expense for deferred foreign taxes related to tax reform as further interpretations of and calculations under the tax law are refined. Given how the tax law was drafted, we now intend to make certain tax elections in order to minimize additional taxes over and above the local statutory rates in Canada and Australia. As a result of our views on these positions, we are revaluing our deferred tax assets and liabilities on our foreign subsidiaries to align with our views on what we believe will be the ultimate taxation of these subsidiaries.

Now, I'll move to capital levels, where our Mortgage Insurance businesses continue to maintain very strong capital positions. In U.S. MI, we finished the second quarter with a PMIER sufficiency ratio of 129% or in excess of $700 million above the required assets up from 124% at the end of first quarter and 122% at the end of second quarter of 2017.

This improvement was primarily driven by solid business performance and positive cash flows partially reduced by a $50 million dividend payment and higher levels of required assets from our strong incremental new insurance written during the quarter. The PMIER sufficiency ratio impact from last year's hurricanes declined from 4 points last quarter to 2 points this quarter as the cure rate from those delinquencies continue to perform as expected.

We will continue to manage our PMIERs compliance with a prudent management buffer. In managing this, we are considering the new GSE proposed capital standards, we believe could be effective as early as first quarter of 2019 based on a confidential draft guidelines we have received from the GSEs in 2Q. If these standards are adopted in the first quarter of 2019 as drafted, we estimate we would remain in compliance with the standards although at a significantly lower level than the current PMIER standards.

In our Canada MI business, we saw an estimated capital ratio of 170% in the quarter, which continues to remain above the company's operating MCT or minimum capital target range of 160% to 165%

We are expecting the Canadian Office of the Superintendent of Financial Institutions, or OSFI, to publish updates to the capital framework in the near term and we'll update the market after the standards are released.

Our Australia MI business ended the quarter with an estimated capital ratio of 190%, which is above the high-end of our prescribed capital amount management target range of 132% to 144%. During the quarter Australia completed AUD 35 million of the previously announced AUD 100 million share buyback and announced first half dividends of AUD 0.12 a share.

We received a total of $20 million in net dividends and proceeds from repurchases from our International Mortgage Insurance subsidiaries during the quarter. Capital in Genworth Life Insurance Company as measured by RBC remained fairly consistent to the prior quarter and is estimated at approximately 275% on a company-action level basis.

On June 28 the NAIC, Capital Adequacy Task Force, adopted previously proposed changes to the RBC calculation under tax reform for 2018 year-end implementation. Because this change lowered certain LTC pre-tax rates on morbidity factors, neutralizing the impact of tax reform on those factors, we believe the negative impact to our RBC ratio will be lower than previously estimated with the current estimated impact to our GLIC consolidated RBC levels of approximately 10 points.

Moving to the holding company, we ended the quarter with approximately $620 million of cash and liquid assets down from last quarter's $1.2 billion after fully redeeming the May 2018 debt maturity of $597 million. During the quarter total net dividends and proceeds from share repurchases to the holding company were $70 million in addition to a small net inflow of $8 million from other intercompany and tax sources. Offsetting this were interest payments of $63 million.

Our ending cash level was approximately $100 million in excess of the 2 times forward debt service target. I will remind investors that our next external holding company debt maturity is not until June of 2020. U.S. MI's $50 million dividend payment is noteworthy in the path of improving our financial flexibility. We will continue to monitor our cash levels and other factors, but don't anticipate another dividend from U.S. MI until sometime in 2019 after considering any impacts of PMIER's 2.0 once finalized.

Now, let's transition, as I do want to mention that $1.5 billion capital investment plan with Oceanwide that we announced last quarter. As Tom discussed, we are working with Oceanwide on details of the capital investment plan where Oceanwide will contribute $1.5 billion to Genworth. We have agreed that this capital will come in over time, after closing with the final amounts of the plan to be contributed by March 31, 2020. The $1.5 billion of capital will further improve Genworth's financial condition and may be used to retire Genworth's debt due in 2020 and 2021 or for future growth opportunities. We also now have three dividend sources with U.S. MI coming online this quarter, which is another important input into the equation.

I also want to reiterate our public statements last quarter regarding capital in our U.S. Life entities now that we are no longer pursuing the unstacking of our life and annuity company GLAIC from, Genworth Life Insurance Company, GLIC. As we evaluate the overall capital plan with Oceanwide, we intend to manage the U.S. Life entities on a standalone basis, as we have no current plans to infuse capital in these businesses nor do we expect to extract capital. Our U.S. Life and LTC insurance businesses must rely on their consolidated statutory capital of approximately $2.7 billion, prudent management of the in-force blocks and the actuarially justified rate action plan to satisfy policyholder obligations.

We believe that given these facts, it is generally recognized that we will receive little or no value from GLIC and its subsidiaries given the performance of our long term care insurance old blocks of business. These blocks have collectively recognized approximately $2.9 billion of statutory losses over the last 12 years. We remain committed to ensuring that we are pursuing and achieving actuarially justified in-force rate actions for the benefit of all of Genworth's U.S. Life Insurance Company policyholders.

To sum things up for the quarter, I am very pleased with our Global Mortgage Insurance performance and the modest de-leveraging we've been able to do after redeeming our May 2018 debt. While our U.S. Life business continues to be challenged, we remain focused on the operational progress including our LTC rate action plan and other strategic actions intended to improve this business.

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

[Operator]

And we will take our first question from Jimmy Bhullar from JPMorgan. Please go ahead.

[Jamminder Singh Bhullar, JPMorgan Securities LLC]

Hi, good morning. Tom, could you just go through the sort of remaining steps needed to complete the acquisition and what are the approvals that you are still waiting for in the U.S. or in China?

[Thomas J. McInerney, Genworth Financial, Inc.]

Jimmy, thank you for the question. Obviously, it's one that investors are very interested in. So, both Oceanwide and Genworth are working hard to submit revised filing information to all the regulators. We're doing that as quickly as we can as both of us have commented, we remain strongly committed to the deal. We do have to resubmit and revise the filings to make the change given that we're not unstacking GLAIC now and so – and we've done that. And so, we did receive approvals from North Carolina, Virginia, South Carolina, Australia and obviously CFIUS in June. They now are going back and looking at the revised information. I don't think there's anything in there that should be a challenge, but they do have to update their approvals based on the revisions.

We obviously continue to work for U.S. MI in addition North Carolina, we have to receive approvals from the GSEs and we continue to work with them. And then, we have the lead on all the U.S. regulatory approvals and Oceanwide has the lead on all the Chinese approvals. There is nothing that I'm aware of that that's a significant issue, it's really getting through all of the revisions and obviously there is quite a bit of information that the regulators have to review, and they're doing that, we're meeting with them, talking with them to answer all their questions. So, we're moving as quickly as we can, and as I said, in my remarks based on just the timelines we're now expecting that we would close sometime in the fourth quarter of this year.

[Jamminder Singh Bhullar, JPMorgan Securities LLC]

And the New York approval is still pending right? That hasn't been secured yet?

[Thomas J. McInerney, Genworth Financial, Inc.]

The New York approval is still pending. We – the team just reviewed with them the CFIUS mitigation plan. New York is generally on deals has taken the lead for all the regulators around the cybersecurity issues, because they have expertise in that department on that, and so they're focused on that but again I think those conversations have gone well.

[Jamminder Singh Bhullar, JPMorgan Securities LLC]

And then the like – it seems like you're confident that you'll get approval, but in case you don't, what are your thoughts on this plan for addressing debt maturities in 2020 and beyond – like would you just rely on asset sales or how do you think about how you'd address that?

[Thomas J. McInerney, Genworth Financial, Inc.]

No, I would say, we're very focused on closing the deal and that's where 100% of our energy is. We do have and we've talked about this and we've disclosed this in our filings. We do have other options to the extent the deal did not receive approval for whatever reason and obviously, as we would need to focus on the 2020 and 2021 data although as Kelly said, we still – we have time between now and June of 2020, but if we were not able to do the deal it would be likely that the options we would ultimately pursue would include raising capital through asset sales. We've talked about the U.S. MI IPO as well to raise cash to meet the debt maturities as they come due.

[Jamminder Singh Bhullar, JPMorgan Securities LLC]

And then just lastly, could you talk about the environment for getting price hikes in long term care. It seems like all the other companies are doing it as well. So, I'm not sure, if that's helped things or is it making it tougher?

[Thomas J. McInerney, Genworth Financial, Inc.]

Jimmy, we've been working on our multiyear rate action plan now for almost five years. We continue to do extremely well. As I said in my remarks and Kelly, we're right on target probably a little bit better than we thought. I would say that – I think post the Penn Treaty insolvency in 2016, I think regulators have taken the viewpoint that they do have to provide these actuarially justified increases in order for the insurance companies to be able to pay their long term care claim. So, I do think, we generally have – yeah, varies by state, but we generally have a cooperative regulatory environment, and we're very pleased with the rate approvals we've been receiving.

[Jamminder Singh Bhullar, JPMorgan Securities LLC]

Okay. Thank you.

[Operator]

And our next question comes from Ryan Krueger from KBW.

[Ryan Krueger, Keefe, Bruyette & Woods, Inc.]

Hi. Good morning. Just one follow-up on the insurance regulatory approvals, I mean are there – do you view this, the process obviously had been ongoing for a long time prior to re-filing the latest documents. So, are you already far – pretty far along in the process given that or did some of the regulators view this as completely restarting the process when you filed the updates?

[Thomas J. McInerney, Genworth Financial, Inc.]

Well, obviously, they had reviewed all the documentation based on the deal as originally structured, which included the unstacking. And so, now that we're now doing the unstacking, we had to revise all the filings, and obviously with the passage of time, we had to update the original filings since they were made in early 2017, used year-end 2016 financial information. They are now – we're now using year-end 2017. So, they're looking at all that but the filings have been updated for the change in the deal. And while it's – we're still working on the $1.5 billion capital plan. We're making progress on that and expect to finalize that soon and we'll – that will also be of interest to the regulators. So, I think the main issue is that there's just a lot of information that they have to review to do their due diligence in order to approve the deal.

[Ryan Krueger, Keefe, Bruyette & Woods, Inc.]

Okay. And then just were there any other material disagreements in the prior – originally other than the unstacking and the cybersecurity issues that you're aware of?

[Thomas J. McInerney, Genworth Financial, Inc.]

Ryan. Good question. I think the main challenges have been the CFIUS concerns with protecting the PII and we – obviously, we've resolved after their satisfaction. The other issue is evaluation of the GLAIC in the unstacking and we – as we've disclosed we couldn't come to an agreement on that between Oceanwide and Genworth and Delaware. So, we are resubmitting the deal without that. I think without that my sense is the U.S. regulators are comfortable with the deal without the unstacking, but obviously they have to go through their process. We can't get ahead of them. And as I say, in fairness to them they have a lot of information to review. But I know of no issues that we have other than in the U.S., there was the cybersecurity issues with CFIUS and then the unstacking issue with Delaware?

[Ryan Krueger, Keefe, Bruyette & Woods, Inc.]

Okay. Just a couple more – couple quick ones. Does Virginia need to – now given they already approved the deal but it was based on the unstacking, now that the unstacking is not happening which affects GLAIC, do they – (00:35:46) is their approval still good or do we need to reapprove it?

[Thomas J. McInerney, Genworth Financial, Inc.]

We did have to – good question, Ryan, we did have to re-file with Virginia. I would say, I think Virginia has been supportive of the deal, but they are now re-evaluating it with the unstacking. I don't see any potential issues there but they do have to go through the process with the updated filing.

[Ryan Krueger, Keefe, Bruyette & Woods, Inc.]

Okay. Last one for Kelly. Can you give us any more detail on what you're seeing on the long term care utilization trends, and I guess how material your – some of the negative trends you're seeing have been in terms of higher utilization on lifetime benefits?

[Kelly L. Groh, Genworth Financial, Inc.]

Yeah. Good morning, Ryan. On benefit utilization, it is a rolling assumption that we do update on a quarterly basis based on the last four quarters worth of experience. But we are seeing kind of a negative trend. Like I said in the lifetime benefits, there's really two areas where we're seeing it, we're seeing the longer duration claims for those that have lifetime benefits or sometimes even the compound benefit inflation options can actually act like lifetime benefits, because the daily benefits in the benefit pool get so much bigger with those. But we also are seeing a little bit of pressure and some non-lifetime claims in the first year and that's kind of emerged post first quarter of 2017.

If I look at the last couple quarters worth of experience the benefit payments have been about 1.5% higher than in the last two quarters on average than what we had predicted in our overall utilization rate. So, it's really just something we're looking at. We're dissecting it by all different types of policies. We don't have an estimate at this point in time, but there is a lot of other assumptions we've got to look at as well. So, what we're really planning on doing is, trying to go through a normal process, updating that in the third or fourth quarter of this year. And we'll give you information as soon as it develops.

[Ryan Krueger, Keefe, Bruyette & Woods, Inc.]

Okay. Great. Thanks for the answers.

[Operator]

And our next question comes from Rick Sherman of Oppenheimer. Please go ahead.

[Rick Michael Sherman, Oppenheimer & Co., Inc.]

Hi. Good morning. I'm curious if one state or two states, let's say did not or would not give their approval, would you still be able to close the deal or would any state basically denying or not approving it render the deal dead.

[Thomas J. McInerney, Genworth Financial, Inc.]

Thank you, Rick, for your question. We do have to receive approval from all of the regulators. So, if any of the regulators did not approve the deal that would be a challenge to the transaction. But at this point, we don't see significant issues with any regulators. And my view is that the reviews are going reasonably well, there's a lot of information they have to get through. But as I said, I don't see with the states – and other regulators that are reviewing the deal, I have – I'm not aware of any significant issues other than the issues we've talked about in the past.

[Rick Michael Sherman, Oppenheimer & Co., Inc.]

I'm just curious, because wouldn't you have the option of just not doing business in that state anymore, if it would just end your business relationship of doing any business in that state, wouldn't that still solve the problem or it doesn't?

[Thomas J. McInerney, Genworth Financial, Inc.]

Well, I mean, it depends on which regulator you're talking about. But our view would be we would want to receive approvals for the deal in all the states that have to approve the deal.

[Rick Michael Sherman, Oppenheimer & Co., Inc.]

Okay. Thank you. That's my question.

[Operator]

And our next question comes from Andrew Molloy from Bank of America.

[Andrew S. Molloy, Bank of America Merrill Lynch]

Hey, good morning. Thank you. Can you provide any visibility or commentary to the remaining regulatory approval process that China Oceanwide is lean on? I still believe they have to, you have to obtain three approvals from three entities in China so, any color or commentary would be great.

[Thomas J. McInerney, Genworth Financial, Inc.]

Thank you, Andrew. The way the parties have managed the required approvals is we're focused on the U.S., Canada, Australia, and China Oceanwide has been focused on the China approvals. Obviously, I and others on our team have been over many times meeting with the regulators there, particularly the commission on banking, insurance regulation. And again, as far as I know, those have generally gone well and there's nothing that I've heard from China Oceanwide or the regulators that I've talked to that seems to be an issue. Obviously, we have to go through that process and the regulators there have to do the approvals. And so, I don't want to get out in front of them but I think generally Oceanwide and we are making good progress both with respect to the Genworth approvals and the approvals needed in China for Oceanwide.

[Andrew S. Molloy, Bank of America Merrill Lynch]

Thank you.

[Operator]

And our next question comes from Tom Gallagher of Evercore. Please go ahead.

[Thomas Gallagher, Evercore Group LLC]

Good morning. Just a question on the long term care review, is that at all involved in the state regulatory approval process, meaning do you need to get through your long term care review before you expect the regulators to approve or are the two totally separate?

[Thomas J. McInerney, Genworth Financial, Inc.]

Tom, that's a good question. I would say, my view is generally that's separate. They're being asked on the deal approval to approve a change of control whether we're owned by Oceanwide or not, we have to go through the same review on our LTC business, the review of the reserves, and obviously based on that review we'll also look at what additional premium approvals we need to do to update our multi-year plan. So, I don't believe anything that occurs on the review process of assumptions would have an impact on the transaction.

[Thomas Gallagher, Evercore Group LLC]

Got it. And then Kelly, are you still seeing a higher proportion of lifetime benefits in terms of new claim submissions when you compare your overall book, the proportion that has lifetime benefits relative to the incurred claims, the submitted claims, how much of those have lifetime benefits, is that – can you talk a bit about whether that's a trend you're seeing, I think you had flagged that a couple of quarters ago?

[Kelly L. Groh, Genworth Financial, Inc.]

Thanks for the question, Tom. We do – the trend has been pretty stable. We have seen, what we do and have put in our assumptions related to our margin testing is that people with lifetime benefits may have a higher propensity to claim. So that was one of the updates we did as a part of our margin testing last year. But really the trend over the last few quarters, really has not changed all that much. In the first half of 2018 though, a few things that we did see as we saw the proportion of people with compound BIO increased about 10%. And those with mental diagnoses increased about 5%. So, those are definitely trends that we're watching.

[Thomas Gallagher, Evercore Group LLC]

Got it. And can you provide any quantification of that when you say people with lifetime benefits have a higher propensity to go on claim, is it, if you look at the total – can you give a statistic maybe of your total claims, how many of those people have lifetime benefits that are on claim just even somewhat directional help on that would be useful?

[Thomas J. McInerney, Genworth Financial, Inc.]

What I would say, Tom, is about 35% of our legacy policies have lifetime benefits, so two-thirds don't. Of the policies issued since our Choice II, which were in the mid-2000s, a very few have lifetime benefits, we haven't offered that since 2013. And I think the point is that if you have a lifetime pool, you're not as worried as a policyholder about using up all of the pool, whereas if you do have a limit obviously, you are more careful in terms of making claims because obviously, there's a limit to it. So, I think that's why we – you would expect that lifetime claims would come – the policyholder would claim relatively sooner than non-lifetime claims because one has an unlimited pool so to speak and the other one doesn't.

[Thomas Gallagher, Evercore Group LLC]

That, that makes sense and Tom do you have the – of the total claims you have currently or current policyholders on claim what percent are lifetime benefits versus non-lifetime benefits?

[Thomas J. McInerney, Genworth Financial, Inc.]

We'll have the financial people and Kelly, I think, will answer that. But what I would remind you of Tom is that when you look at the premium increases we're going after, the ones we're really focused on and where there very substantial premium increases would be where policies that have lifetime benefits. And that's about a third of our policies and then policies where there is a 5% compound inflation factor and about three quarters of our policies have that.

So, those are the ones that clearly we need to do the most work on in terms of getting either future premium increases or benefit reductions to manage the liabilities we have there and I think Kelly has some more details on the numbers.

[Kelly L. Groh, Genworth Financial, Inc.]

Yeah. And Tom it's about a third of our current claimants do have lifetime benefits. So, where we're really seeing the pressure is in duration in seven plus and it's about a third.

[Thomas Gallagher, Evercore Group LLC]

Okay. Thank you.

[Thomas J. McInerney, Genworth Financial, Inc.]

Thank you.

[Operator]

And our next question comes from Peter Troisi from Barclays. Please go ahead.

[Peter Troisi, Barclays Capital, Inc.]

Great thanks. Just a couple questions for me. First on the holdco cash you mentioned the target of 2 times debt service. How far out do you look when thinking about that target, would you keep that target even after the China Oceanwide transaction closes, if it does?

[Kelly L. Groh, Genworth Financial, Inc.]

Thanks for the question, Peter. It's definitely what we're managing too. It's what we show the rating agencies and as we work on the capital plan with Oceanwide obviously, our goal is to reduce our debt overall. So, the amount of holdco cash we've got to hold will be less at that point in time. But we're working through it, it's the target that we're currently operating the company to.

[Peter Troisi, Barclays Capital, Inc.]

Okay that makes sense. And then just secondly, have you given any thought to what type of financial disclosure, you'll provide going forward assuming that the China Oceanwide transaction closes, I know that the insurance operating companies will have to continue to file statutory statements with the regulators. But what other types of financial disclosure do you think you'll provide post-closing, if you receive all regulatory approvals?

[Thomas J. McInerney, Genworth Financial, Inc.]

Yeah, our plan is to obviously under purchase accounting, the basis of accounting completely changes based on the purchase price and the value of the company, as at the closing of the transaction. So, everything does get reset on a U.S. GAAP basis. And under the term loan that we entered into and closed on March 7, we do have a requirement to continue to provide U.S. GAAP base financial statements, 60 days after the quarter end and 90 days after the year end. So our intention is to continue to do that.

[Peter Troisi, Barclays Capital, Inc.]

Okay, thanks, Kelly.

[Operator]

And ladies and gentlemen, we have time for one final question from Joshua Esterov from CreditSights. Please go ahead.

[Josh Esterov, CreditSights, Inc.]

Hey, good morning. Can you talk about the rationale for sending $50 million from U.S. MI this quarter, I guess especially as you now intend to wait for the next iteration of PMIERs, is that just the maximum you felt comfortable sending or are there some issues there that could prevent distribution, let's say, in the third or fourth quarter?

[Kelly L. Groh, Genworth Financial, Inc.]

Thanks for the question, Josh, it's Kelly. It really is the amount that we felt appropriate at this point in time, when you look at our overall PMIERs ratio at 129%, it's extremely strong, we've got a lot of unassigned surplus in U.S. MI as well, but we do want to be cautious. We don't need the cash, we've got a buffer at the holding company right now, we have the ability to take dividends if we need to but what we'll plan on doing is looking at our unassigned surplus as of yearend the amount we've got in terms of available dividends as of 12/31/2018 based on our statutory filings then, we'll look at the new PMIERs 2.0 standards that we anticipate going into effect at the beginning of 2019 and size our dividends appropriately there. It's also important for us to have an efficient capital structure and keeping too much capital in the company won't make sense over the long term. But given our ratings differential, we do want to make sure we're adequately capitalized so that we can stay competitive in the marketplace.

[Josh Esterov, CreditSights, Inc.]

Thanks a lot.

[Operator]

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

[Thomas J. McInerney, Genworth Financial, Inc.]

Thank you, Savannah and thanks to all of you for your time and questions today. We're very proud of our second quarter 2018 performance and continue to work very hard towards closing the transaction with Oceanwide. We appreciate your continued interest in Genworth and we will back to you with updates as soon as they become available. Thank you very much.

[Operator]

And ladies and gentlemen, this concludes the Genworth Financial second quarter earnings conference call.

Thank you for your participation. At this time, the call will end.