Genworth Financial Inc

NYSE:GNW

Earnings Call Transcript 2018-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to Genworth Financial's Third Quarter 2018 Conference Call. My name is Amy, and I will be your coordinator today. At this time, all participants are in 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, speakerphones or headsets during the Q&A portion of today's call.

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

[Tim Owens, Vice President of Investor Relations]

Thank you, operator. Good morning, everyone, and thank you for joining Genworth's third 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 our 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.

Before I turn the call over to Tom and Kelly, as we have previously announced, we planned to hold our 2018 annual stockholders meeting on December 13 to comply with the New York Stock Exchange rules. Our 2018 proxy statement will be filed in the near future. Any event that propose merger with Oceanwide is completed by December 13, 2018, the 2018 annual stockholders meeting will not be held.

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

[Tom McInerney, President and Chief Executive Officer]

Good morning and thank you for joining today's earnings call. Genworth had a very good third quarter delivering strong earnings, execution against our strategic priorities and significant progress towards closing the proposed transaction with Oceanwide.

In the third quarter, Genworth generated $145 million in adjusted operating income or $0.29 per diluted share compared with adjusted operating income of $76 million or $0.15 per diluted share in the prior year period. Our global mortgage insurance business continues to drive earnings with strong growth in our U.S. and Canada MI businesses. Our U.S. life insurance results were mixed with strong performance in our fixed annuity business offset by less favorable performance in our long-term care on life insurance businesses.

Starting with U.S. MI, third quarter adjusted operating income increased 62% year-over-year to $118 million driven by solid insurance and force growth, favorable loss performance and benefits from the lower tax rate. U.S. MI's capital position remains strong, ending the quarter with over $750 million in capital above PMIERs requirement. As many of you know PMIERs 2.0 was finalized in September, and will come effect as of March 31, 2019, and we will also have significant access against this new standard.

In Canada, adjusted operating income increased 22% year-over-year to $44 million with stable loss performance. Canada's capital ratio strengthened compared to the second quarter in the prior year period and remains well above than minimum requirements. And in Australia, adjusted operating income increased 50% year-over-year to $17 million.

Our U.S. Life Insurance segment delivered an operating loss of $3 million, primarily driven by unfavorable LTC claim terminations, higher LTC benefit utilization trends and new LTC claims. Our LTC premium rate action plan remains a high strategic priority for Genworth.

As shown on Slide 10, we've received 39 state filing approvals in the third quarter impacting $294 million of imports premiums with an average premium increase of 56%, bringing our year-to-date total of impacted in force premiums to $526 million. This plans performing in line with our expectations, and we are on track to meet our full year goals.

Let me now turn to review of the progress made towards completing the Oceanwide transaction. Since Genwroth and Oceanwide received clearance from CFIUS in June, we have made significant strides towards satisfying the remaining closing conditions.

In the third quarter, we submitted important supplemental information to our regulators to facilitate their review, including updated details around the capital investment plan. Under the capital investment plan, Oceanwide will contribute an aggregate of $1.5 billion to Genworth and several tranches found the closing the transaction with the final tranche contributed by March 31, 2020, subject to receipt of the required regulatory approvals.

I am very pleased to report that we reached the critical milestone with the Delaware Department of Insurance last week. Delaware, one of our primary state regulators, set a date for the public hearing on the proposed transaction. This has been a highly anticipated moment for both Genworth and Oceanwide. The public hearing, which is a formal step in Delaware's approval process, will be held on November 28. The Delaware commissioner has up to 30 days following the hearing to issue a ruling on our transaction. Delaware is the only regulator of Genworth that will hold a public hearing for this transaction. Given the timing of the hearing date and duration of the review period, we are targeting closing the deal by year end.

Genworth and Oceanwide also announced last week that Genworth will contribute $175 million in capital to GLAIC in phases, post-closing, with the final amount contributed by the end of January 2020. As you may recall, the $175 million had been previously committed by Genworth to facilitate the unstacking of GLAIC from GLIC. It is important to note that Genworth could not make this contribution to GLIC without Oceanwide's $1.5 billion capital investment plan. We believe the Oceanwide capital plan and the $175 million contribution to GLIC clearly demonstrates that the Oceanwide acquisition is in the best interest of policyholders, customers and other stakeholders.

As Kelly will discuss in further detail, Genworth's position on future capital support for GLAIC has not changed. The U.S. live businesses will continue to be managed on a standalone basis with the continued need for actual and justified LTC premium increases and benefit reductions. Oceanwide and Genworth have no plans to infuse additional capital to the legacy LTC business beyond the $175 million.

With these significant milestones behind us, we are now fully focused on satisfying the remaining closing conditions and closing our transaction by the end of the year. Genworth has some regular discussions with our state and other U.S. and international regulators and Oceanwide continues to make progress with Chinese regulators.

As you may have seen The National Development Reform Commission, or The NDRC, has accepted Oceanwide's filing with respect to the proposed transaction, which concludes NDRC's review process enables Oceanwide to move forward with the rest of the regulatory processes in China. The hard work and dedication to this transaction by Oceanwide and Genworth is a testament to the importance of this transaction for our shareholders, policyholders, customers, employees and other stakeholders. I'm very pleased with the progress we have made over the past few months and the momentum we have heading into the end of the year.

Now I’ll turn the call over to Kelly to review our quarterly results and capital position in more detail.

[Kelly Groh, Chief Financial Officer]

Thanks, Tom, and good morning, everyone. Today, I will cover our third quarter financial results and the key drivers, capital levels in our businesses, and updates around cash and flexibility at our holding company.

Let's begin with this quarter's financial performance. We reported net income for the quarter of $146 million and adjusted operating income of $145 million. Our overall results continue to reflect a very strong loss performance in our U.S. and Canadian mortgage insurance businesses. Our U.S. Life Insurance business results were mixed with continued strong fixed annuity performance and losses in long term care and life insurance.

Our strong results in our mortgage insurance businesses continue to reflect positive macroeconomic environment, including steady economic growth, low unemployment levels and favorable housing trends in most regions.

In our U.S. Mortgage Insurance business, our third quarter reported loss ratio was 11%, which is up 19 points from the prior quarter and down nine points from the prior year. Last quarter's loss ratio reflected a favorable pre-tax $28 million reserve adjustment, which benefited earnings by $22 million dollars and reduced the loss ratio by 15 points to a negative 8%. The sequential increase in the loss ratio absent that adjustment was driven by less favorable metrics and aging partially offset with the lower reserve factor applied to new delinquencies in the quarter.

We continue to track the incremental losses from last year's hurricanes and these delinquencies are performing consistent with what we have reserved. Our exposure to the most recent hurricanes, Florence and Michael, is lower and we do not anticipate any material impacts from these events.

Overall, insurance in-force in U.S. MI, continues to grow reaching an all time high of $163 billion at 3Q, '18. This was up 10% versus last year and reflects favorable persistency trends as well as strong levels of new insurance written. The lower U.S. tax rate continued to provide earnings lift by approximately $21 million in the quarter versus last year's rate. The overall U.S. origination market was stable versus the prior quarter. Purchase origination growth has slowed due to lower housing affordability and re-financings given higher mortgage rates.

Our New Insurance Written, or NIW, was $10.3 billion, down 10% sequentially. We continue to monitor our market share given the highly competitive pricing environment, our lower ratings than our competitors, the transaction uncertainty with Oceanwide and increased customer concentration. While our strong capital levels and differentiated service and product offerings have started to mitigate from this pressure, we believe our market share declined this quarter, primarily from the loss of one customer.

Turning to Canada, the business's loss ratio decreased one point from the prior quarter to 14%, primarily reflecting a modest decrease in new delinquencies, net of cures, mainly in both Ontario and the Atlantic region. The loss ratio was flat versus the prior year as lower new delinquencies were offset by less favorable loss reserve development. Canada updated their loss ratio guidance last quarter to a range of 10% to 20%, and then year-to-date loss ratio of 14% falls within that range.

The territorial changes made with the U.S. tax reform last year continue to benefit Genworth's share of Canada's earnings by approximately $7 million versus the prior year as the segment's effective tax rate of approximately 27% now more closely reflects the Canadian corporate tax rate. Flow New in Canada increased 16% sequentially, primarily from a seasonally larger origination market, although was down 2% versus the prior year, due to a modestly smaller origination market driven by some of the more recent regulatory changes.

Moving to Australia, the loss ratio in the quarter was 31%, up 3 points versus the prior quarter due primarily to the decline in earned premiums resulting from last quarter's policy cancellation efforts, which was partially offset by favorable aging. The loss ratio was down six points versus the prior year, mostly the result of higher earned premiums from the change in earnings curve that occurred in the fourth quarter of 2017.

On Australia's IFRS accounting basis, the year-to-date loss ratio is 53%. As a result, the business has changed its total year 2018 loss ratio expectation to 50% to 55% from its previous range of 40% to 50%. As a reminder, our Australia business completed a review of its premium earnings pattern in the fourth quarter of 2017 resulting in accumulative adjustment of the unearned premium reserve that was applied retrospectively for U.S. GAAP accounting. The U.S. GAAP treatment of the Australia earnings group adjustment is different than IFRS in Australia, which adjusted the earnings curve prospectively versus retrospectively. This results in differences in earn premiums, loss ratio metrics and earnings when the business reports locally. Australia is expected to complete a similar evaluation in the fourth quarter of 2018. Our Flow New business levels in Australia were up 5% versus the prior quarter and 8% versus the prior year both primarily the result of increased activity from certain key customers.

Now to discuss our U.S. Life Insurance segment. Our third quarter results were primarily driven by adverse existing claim performance in long term care and unfavorable mortality in life insurance contracted with stable performance in our fixed annuity business. In LTC, we did see lower terminations in the third quarter, which is generally consistent with seasonal patterns as we tend to see higher terminations in the first half of the year and lower terminations in the second half of the year. We continue to see utilization pressure during the quarter as policy holders are utilizing more of their daily benefit amounts than the initial reserves assumed. We are monitoring the elevated benefit utilization levels as claims continue to develop.

Earnings on our acquired block were down sequentially as the prior quarter's results reflected a favorable true up for the seasonably high claim termination results from the first quarter. Our annual review of the claims reserves will be completed in the fourth quarter along with our loss recognition testing and cash flow testing for the active life reserves. The claim utilization trends are an area of focus for the reserve review and may impact claim reserves. Although the work on this assumption as well as other assumptions including any methodology changes is not yet complete.

The finalization of the claims review is taking a little longer than in recent years. As this year we are contemplating methodology changes around how to define original situs and estimate future utilization of benefits. Given the complexity of these potential changes, significant review is required. Additionally, we have engaged a third-party consulting firm to evaluate any potential changes. We've seen very good results on our multi-year in-force rate action plan and most regulators have been approving actuarially justified rate action requests. These approval amounts 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, overall mortality continues to be worse than expectations. Results versus the prior quarter reflected higher mortality in term life along with lower premiums. We did see modest improvement in Universal Life mortality versus last quarter although this is still running above expectations. Compared to the prior year, Life results were impacted by lower in-force earnings from increased reinsurance and a gradual run off of the block. Results in the prior year included an unfavorable impact of $15 million after tax from model refinements.

Although mortality levels will deviate each period, we have seen trends over the last several years and throughout 2018 of higher mortality in our universal and term universal life insurance products than our current assumptions in loss recognition testing. The analysis of this is not yet complete, and we expect to evaluate updating this and other assumptions as part of our annual assumption review to be completed in the fourth quarter.

In our fixed annuity products, we saw less favorable variable investment income and unfavorable mortality versus the prior quarter. Results versus the prior year were better reflecting improved mortality, a lower tax rate and the non-recurrence of the $6 million after-tax loss recognition charge in third quarter of 2017 related to single premium immediate annuities, mainly from lower interest rates in that period.

Our loss in Corporate and Other segment was lower than the prior period mainly due to a $10 million benefit related to tax reform adjustments in last quarter's $19 million expense related to a revaluation of deferred tax assets and liabilities on foreign subsidiaries. We continue to evaluate certain provisions within the Tax Cuts and Jobs Act enacted last year, such as the global intangible low taxed income or guilty provision. These provisions may have an impact on U.S. and foreign deferred taxes as well as the effective tax rate reported by our foreign 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 third quarter with the PMIERs efficiency ratio of 130%, or in excess of $750 million above the required assets, up from 129% at the end of the second quarter and 122% at the end of the third quarter of 2017. This improvement was primarily driven by solid business performance and positive cash flows.

As we disclosed last month, the revised private mortgage insurer eligibility requirements or PMIERs 2.0, have been finalized by the Federal Housing Finance Agency, FHFA, with a first quarter 2019 implementation date. If PMIERs 2.0 had been effective as of September 30, 2018, we estimate that our sufficiency ratio would have been approximately 120% or more than $550 million of available assets above the PMIERs 2.0 requirements.

In our Canada MI business, we found estimated capital ratio of 171% in the quarter, which continues to remain above the company's operating MCT or Minimum Capital Target range of 160% to 165%. During the quarter, Canada completed CAD50 million of share repurchases. The Canadian Office of the Superintendent of Financial Institutions, or OSFI, did finalize updates to the capital framework during the quarter, which will become effective January 1, 2019. These new requirements include an increase of 5% in the base total asset requirements on existing insurance in-force and eliminate a onetime update to credit scores for 2015 and prior books. Collectively, these new requirements should permit the business to operate on a more efficient capital basis for 2019. And as the Canada business disclosed last evening, this may permit more meaningful levels of capital redeployment in addition to regular quarterly dividends in 2019.

Our Australia MI business ended the quarter with an estimated capital ratio of 185%, which is above the high end of our prescribed capital amount or PCA, management target range of 132% to 144%. Australia did complete the remainder of their previously announced AUD100 million share repurchase program during the quarter. The Genworth Holding Company received a total of $78 million in net dividends and proceeds from repurchases from our international mortgage insurance subsidiaries during the quarter.

Capital and Genworth Life Insurance Company, or GLIC, as measured by RBC, declined slightly versus the prior quarter due primarily to long term care insurance performance and is estimated at approximately 270% on a company action level basis.

We are still anticipating incorporating new and NAIC RBC factors related to tax reform at year end 2018. This change in RBC factors is expected to result in a roughly 10-point decline in GLIC's consolidated RBC level. Additionally, we expect to record an increase in our AG 38 AD reserves of at least $95 million, which at that amount would reduce RBC by an additional 10 points. Note, that if there are assumption updates in the U.S. Life business, RBC levels could be further impacted.

As we disclosed last week as a part of the Delaware Regulatory update, following closing of the transaction with Oceanwide, Genworth will contribute to GLIC $175 million over the next year and half with the final amount contributed by January 31, 2020.

As a reminder, the $175 million was generated as a tax benefit to the holding company in July of 2016 from a block transaction completed earlier that year and was originally committed as a part of the consideration for the unstacking of GLAIC. This contribution to GLIC is a special one time commitment made in conjunction with the proposed transaction with Oceanwide. It does not change our previously disclosed intention to manage the U.S. Life entities on a standalone basis with no future plans to infuse capital in these businesses. The U.S. Life businesses will rely on their consolidated statutory capital of approximately $2.5 billion, prudent management of the in-force blocks and the actuarially justified rate actions to satisfy policyholder obligations.

Earlier this month, we disclosed that we were successful with our bond consent process. This action which removed GLAIC from certain events of default was not only ratings positive, but also a prudent step to take as we move forward.

Moving to the holding company, we ended the quarter with over $600 million in cash and liquid assets as compared to last quarter's approximately $620 million. During the quarter, total net dividends and proceeds from share repurchases to the holding company were $78 million, offsetting this were interest payment of $71 million and a net outflow of $20 million, reflecting tax payments and other miscellaneous items.

Our ending cash level is approximately $100 million in excess of our two times forward debt service target, and our next holding company senior debt maturity is not until June of 2020. We continue to discuss the $1.5 billion capital plan with Oceanwide and optimizing the timing of the contributions, which will come in overtime after closing, with the final amounts contributed by March 31, 2020. This evaluation considers projected mortgage insurance dividends during this time and other holding company outlays, including the $175 million contribution to GLIC and the intercompany note due in March of 2020.

To sum things up for the quarter, I'm very pleased with our global mortgage insurance performance and the successful bond consent process, which eliminated a technical default risk. 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]

Ladies and gentlemen, we will now begin the Q&A portion of the call. [Operator Instructions] We'll take our first question from Ryan Krueger with KBW.

[Ryan Krueger, KBW]

Hi, thanks. Good morning. Could you give us some additional perspective on the other approvals that you need to obtain in China and the process to achieve that?

[Tom McInerney, President and Chief Executive Officer]

So Ryan, I talked about the NDRC process. And so they have oversight an approval for macroeconomic planning policy issues in China. So they have accepted the filing. So I think that allows us to go forward. The other entities include SAFE, which is the State Administrator for Foreign Exchange, so they, obviously, have to sign off the funding for the deal. And we have a contingent structure in place for that. So I think both Oceanwide and Genworth feel comfortable with where we are, but, obviously, ultimately SAFE will have to opine. In the CBIRC, which is the China Banking and Insurance Regulatory Commission, they will be providing an advisory opinion on the deal, and so that's another process we go through. I have, in the last so many months, have had several meetings with this CBIRC. And again, I think, I've mentioned before that they are supportive because of the opportunity that Oceanwide and Genworth have in terms of bringing the expertise and long term care insurance to China, which is a significant priority.

[Ryan Krueger, KBW]

Thanks. And then in the U.S. outside of Delaware is New York, the only other state that you have not received approval from?

[Tom McInerney, President and Chief Executive Officer]

So we -- good question Ryan. We've received approval before from Virginia and North Carolina. But they were approving the deal when we were still pursuing and staffing. So not only changed the deal and done the supplementation filings, they have to reapprove for the new structure, but again, I think that they seem to be comfortable. In New York, those discussions are also going well. I think we've mentioned in the past that New York is among the 50 states that deemed to be the expert in the cyber security issues, so one of the areas of focus -- for New York -- for both New York and also the other state regulators is on the cyber security protection. So obviously, since the June approval by the CFIUS, we have reviewed with New York and with the other regulators, but particular with New York, the CFIUS mitigation plan, and my view is they seemed to be quite comfortable with that. I think New York has their own cyber security regulations, and the CFIUS plan in part was designed, so that it would also meet all the parameters for New York. So we feel comfortable with that. And then the GSEs have to approve the deal. Their focus is on, obviously, U.S. MI. And again, we think this transaction is a positive for U.S. MI particularly because of the $1.5 billion capital investment plan. And then, in addition to the GSEs overseeing U.S. MI, the Canada and Australia regulators have to approve the deal on behalf of the GMA and MIC [ph]. So those are the overall regulatory process. Obviously, it took quite awhile 18 months or so on the CFIUS process, and we were focused on that. And I think the other regulators wanted to see how that process went. And so since June, we've really geared up for the other regulators. And I would, from a Genworth perspective, we think those processes are going well.

[Ryan Krueger, KBW]

Thanks. And then, just one on long-term care. Given the outstanding reserve review, to what extent does -- is that uncertainty a potential issue with receiving regulatory approvals? And then, I guess, related to that if you do have negative development on the active life reserve, is your position that you can assume further future rate increases beyond what is already included in your reserves?

[Tom McInerney, President and Chief Executive Officer]

So, again, good question. So on the first one, so from Delaware's perspective, and they oversee GLIC. The decision for them is does the deal -- is it in the -- for the benefit of the policyholders versus the status flow. And I would say, first, whatever happens on the DLR and ALR, and Kelly may want to give a little bit of background on the process there. That will occur no matter whether we do the deal or not. So I think the Delaware review will be primarily based. And the points that Genworth will be making, we think it's clearly the deal is clearly in the best interest of policyholders because of the 1.5 billion capital plan. We're now able with that capital plan to invest $175 million into GLIC, which we would not have been able to do without it. It also allows us, I think, to manage the company going forward as a private company without the quarterly pressures that you have as a public company. And I think, our position is that that makes the multi-year rate action plan, our ability to be flexible on that. So I think for all those reasons, we feel good about representing to Delaware at the hearing that this is clearly in the best interest of policyholders. And again, coming back to, I think, whatever happens on the reserves, we obviously have ongoing meetings. Kelly Groh and Lori Evangel, our Chief Risk Officer, meet with the regulators quarterly on results as we are announcing them. And so again, I think, they're generally comfortable with where we are.

[Operator]

Our next question is from Jimmy Bhullar with JP Morgan.

[Jimmy Bhullar, JP Morgan]

Hi, good morning. I just had one follow-up to the deal. Just what's your level of confidence that you can actually complete the transaction before the agreement expires? I guess because the Delaware hearings scheduled for late November. I doubt they're going to come back that fast. So are you -- I'm assuming you're both committed to extending the December 1st date, but what do you think the timeline is in terms of getting the approval done in Delaware and the others?

[Tom McInerney, President and Chief Executive Officer]

Jimmy, good questions. The hearing is November 28th. And so the commissioner of Delaware has up to 30 days following the hearing to make decision. We would expect that he may not take or the department may not take all of that time, but that will bring us to the end of December. We also think the other -- the only public hearing we have to have is with Delaware. So we think the other regulators are on track to certainly meet a year-end closing. We've extended the termination date to December 1st. What that really means is, after December 31st, so we don't extend either of us would have the right to terminate the merger agreement. I think we've demonstrated with, I think, we've extended 5 or 6x that we're both very committed to the deal. And I would say that certainly speaking for Genworth, we're certainly committed. And if we have to extend December 1st date, we will. And I also believe -- I don't want to speak for Chairman Lu, but I'm highly confident based on our strong relationship that they're also comfortable with that. We're both hoping that we can meet all the regulatory approvals in all the countries so that we can close by the end of the year.

[Jimmy Bhullar, JP Morgan]

And then just on the U.S. MI business, I don't think you're planning on taking any dividends out in the 4Q book. What's the likelihood of and what's your expectations for dividends out of that business in 2019?

[Kevin Schneider]

Jimmy, this is Kevin. You're correct. We do not have any additional plans for more dividends in calendar '18. Following the second quarter dividend, we still had $270 million of unassigned surplus in our flagship mortgage insurance writer Gemaco, and more than $1.3 billion in excess to the 25 to statutory requirement. So I guess, what I tell you at this point, we will look at our capital situation as we head into the New Year. And we'll reevaluate that situation subject to whatever the prevailing market conditions are at that point. And we'll update you going into 2019, if it's still necessary. But at this point, we're not ready to make that call.

[Jimmy Bhullar, JP Morgan]

And then just lastly on -- you had -- lost the client this quarter, I think, just given your rating situation. Are you concerned about additional client sort of disruption? Have you had any discussions with anybody else?

[Kevin Schneider]

Our share has been impacted over the last year so due to a number of reasons, not just our financial condition, but competitive pricing, some concerns around Genwroth's financial condition as well as some concerns over the proposed transaction with Oceanwide. In the first half of the year, we benefitted from some volume pickups due to increases in concentration in our customer base. And we disclosed that and that could create some volatility if those customers moved around at all. And so what happened in the third quarter is, we did lose one of those customers in the third quarter. And that was the material driver both on a BPQ basis and a variance to prior year in terms of the downward trend in our share. This is a competitive industry, has been forever and continues to be. And so, we will continue to go out as the business does every day and fight to deliver value and pick up more production with all of our -- with our remaining customer base. And the customer that we lost could become a customer again going forward. So, and we are encouraged by the capital contribution plan that should actually help us going forward from a ratings and financial conditions state over time.

[Operator]

Ladies and gentlemen our last question today will be from Tom Gallagher with Evercore.

[Tom Gallagher, Evercore]

Good morning. Kelly, you had mentioned the planned methodology changes for long-term care claims or long-term care claims estimates. Can you elaborate a bit further on exactly what the methodology change is going to entail?

[Kelly Groh, Chief Financial Officer]

Good morning, Tom. I'll be happy to take that question. You know when I think about DLR, you know just to level set everyone, our DLR, our claims reserve is about $7 billion on a statutory basis, and about $6.7 billion on a GAAP basis. As I mentioned over – every quarter, we have to assert that our current reserves are our best estimate on claims reserves. So it's something that we look at every quarter. We do update a few of the assumptions every quarter. We do a rolling utilization update. We update for interest rates on a quarterly basis. We are evaluating methodology changes though because in the last couple quarters, one of the things I've talked about is the negative utilization experience versus the reserves we put up for each of those claims. What we're really looking at is if a more complicated model will better track that experience development, so rather than use kind of our lagging simplified model where we just roll with expect -- or with actual experience, it would be more of a generalized linear model that takes a lot of different variables in. Given the complexity of that though, we're really trying to assess if this is really appropriate given industry practice, given third-party actuarial view on does this better track what we would expect to see from an emerging trend perspective. And that's really the reason we've delayed from the third to the fourth quarter is the fact that we're not sure whether or not a methodology change is appropriate at this time and we need that third-party view to be able to give us feedback and tell us if they think that this would fit our claims experience better.

[Tom Gallagher, Evercore]

Got it. And the third-party consultant is focused specifically on this issue, or is it broader than that considering long-term morbidity assumptions et cetera, how kind of broad is the third-party consultant engagement?

[Kelly Groh, Chief Financial Officer]

We are asking them to look at all of our current claims review and any potential changes that we're evaluating at this point in time. I'm not going to go into every detailed assumption. But they will be looking at not just the methodology changes associated with a generalized linear model, but they will be looking at our entire claims reserves.

[Tom Gallagher, Evercore]

Okay. And then, Tom, the -- so after the contribution of the $175 million to the life and -- life and annuity businesses, I think, it said in the press release and you've mentioned there won't be -- the intention is not to make any further contributions to these subsidiaries by Genworth or Oceanwide after that final contribution. Are there any contingencies to that or is your understanding that it is then effectively legally isolated for all practical purposes? Or are there any remaining contingencies depending on some kind of MAC clause if LTC has worse experience or anything like that?

[Tom McInerney, President and Chief Executive Officer]

Tom, those are great questions. The first thing I would say in terms of the isolation, we did, as you know, receive the bond consent approval on GLAIC. So now anything that becomes a challenge for GLIC, GLAIC, or GLICNY, would be outside of the bond covenant. So we're very pleased with that. I have -- in January, I'll have been here six years, and I would say for my entire tenure, I have been meeting with all the regulators in all the states. And have made it very clear that -- while there is still roughly $2.5 billion of capital into the life companies, the current shareholders or new shareholders would not be able or willing to contribute additional capital on the legacy blocks. And that those legacy blocks, the goal was to work together with the regulators to get to breakeven at some point in the future, and we're on track for that. And I do think that the regulators have been quite helpful. And in terms of the deal, we have said that you can't expect, again the current shareholders or new shareholders to continue to invest in the legacy block. As part of the discussions in the last month or so with Delaware and the other principal regulators, we did agree to invest $175 million into GLIC and I think that obviously is the big plus and that comes because of the deal and the fact that Oceanwide is contributing $1.5 billion overall, which as Kelly and I have said a few times now, our intention would be to use that primarily to pay off the '20 and '21 debt, but for other growth opportunities to the extent we have that. So, I believe that the US state regulators understand that the principal way we're going to get the company -- the GLIC and GLICNY to breakeven going forward is through premium increases and I think they're comfortable with that. And again I think the value-add for the deal from the regulators and the policyholders' perspective is we are able to invest $175 million that we wouldn't have been able to do without the capital contribution from Oceanwide.

[Operator]

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

[Tom McInerney, President and Chief Executive Officer]

To all of you for your time and questions today, I'm very proud of Genworth's performance and progress during the quarter. And I want to thank all of our Genworth business leaders and all of Genworth employees for continuing to primarily focus on the businesses and our customers as some of us focus on all the steps we have to take to get the transaction approved. We certainly appreciate the continued investment and interest from all of our shareholders in Genworth. And we expect to be back to you with update as soon as they are available. And thanks again for being on the call today.

[Operator]

Ladies and gentlemen, this concludes Genworth Financial third quarter earnings conference call. Thank you for your participation. At this time, the call will end.