Good morning, ladies and gentlemen, and welcome to Genworth Financial's Second Quarter 2019 Earnings Conference Call. My name is Diane 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, this 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.

Thank you, operator. Good morning, everyone, and thank you for joining Genworth's second quarter 2019 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 maybe 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. And when we talk about results of our international businesses, please note that all percentage changes exclude the impact of foreign exchange. And finally, references to statutory results are estimates due to the timing of the filing of the statutory statements. And now, I'll turn the call over to our CEO, Tom McInerney.

Good morning and thank you for joining our call. Today we will provide you with a review of Genworth's strong second quarter results as well as provide an update on the recent announcements with respect to the transaction with Oceanwide. First a brief review of our results. In the second quarter, Genworth generated $204 million in adjusted operating income or $0.40 per diluted share. Our global mortgage insurance businesses continue to drive our strong operating performance with outstanding growth in our U.S. business. U.S. MI reported its highest quarterly adjusted operating income since Genworth's IPO in 2004 increasing 7% year-over-year to $147 million. This performance was driven by continued strength in new insurance written and persistency resulting in earned premiums exceeding $200 million. Notably, U.S. MI achieved $15.8 billion in flow NIW as a result of an increase in the mortgage insurance market as well as our continued ability to maintain and grow share in the U.S. market. U.S. MI' capital position remains strong with the PMIER sufficiency ratio of 123% in excess of $600 million in capital above the revised PMIER's requirements. In Canada, adjusted operating income for the second quarter declined 7% year-over-year to $41 million; flow NIW increased 11% year-over-year, driven by a large originations market; Canada's capital ratio remains well above regulatory requirements and our management targets. In Australia, adjusted operating income declined year-over-year to $13 million, primarily due to a lower cancellation activity and the seasoning of it's in-force portfolio. Capital levels were also strong for Australia, increasing to 208% of its prescribed capital amount. Our U.S. Life Insurance segment generated $66 million in adjusted operating income, up 16% year-over-year, primarily driven by higher LTC performance as a result of our in-force rate actions and favorable benefit utilization partially offset by growth in new claims.…

Thanks, Tom, and good morning, everyone. Today, I will cover more detail on our second quarter financial results and key drivers, capital levels in our businesses and updates around cash and flexibility at our holding company as the merger with Oceanwide has extended and we look at disposition options for our ownership stake in our Canadian mortgage insurer Genworth Canada. Let's begin with this quarter's financial performance. We reported net income for the quarter of $168 million and an adjusted operating income of $204 million. Our mortgage insurance businesses continue to perform well with very strong loss ratio performance in the U.S. and Canada and solid capital levels in all the mortgage insurance businesses. Our U.S. Life results were driven by seasonality and good in force rate action results in long-term care insurance and some net favorable items in life insurance that we don't expect to recur. Underlying our collective mortgage insurance results is an overall solid macroeconomic environment, including steady economic growth, low unemployment, and interest rate levels and stable housing trends in most markets and at home price levels where we generally provide mortgage insurance coverage. USMI's adjusted operating income was $147 million in the quarter which was up $23 million sequentially and $10 million versus the prior year. The second quarter reported loss ratio was zero, which is down eight points from the prior quarter and up eight points from the prior year. As noted in the press release, due to sustained favorable claims experience, we did have a $10 million reserve factor update, which benefited earnings in the quarter by $8 million after-tax. This reduced the second quarter loss ratio by five points. Note that 2Q, 2018's reported loss ratio of negative 8% also included a reserve release, which provided a 15-point benefit to that period's…

Ladies and gentlemen, we will now begin the Q&A portion of the call. [Operator Instructions] We will take our first question from Jimmy Bhullar from JPMorgan. Please go ahead.

Hi. Good morning. First, I just had a question on long-term care as you are doing your reviews in the second half of the year. What are the main things that would have changed versus the last time you did your reviews? I guess, interest rates are worse than before. Are there things that you see in the business whether its price increases claims trends or otherwise that would offset some of the headwind related to the adjustment on rates?

Thanks for the question, Jimmy, its Kelly. We're really early in the process. Like I mentioned in my prepared remarks we do plan on finishing our claims reviews and we did do an update. We did an update last year on benefit utilization rate methodology and we think that's holding rather well. So right now the trends are holding, but we're still early in our review related to the claims review that we'll finalize in the third quarter. Related to fourth quarter, absolutely interest rates have changed. Now I do want to remind you, when we look at our loss recognition testing margins, we use our average portfolio rate as our discount rate. And -- so last year that was about 5.3% on our HGAAP business. And it's really not all that different as of the second quarter, right now. So, again it's a large portfolio that moves rather slowly with reinvestments. So we haven't seen it move. But do have some sensitivities on interest rates there. Related to our newer blocks, we are getting more credible claims, data experience. And we're looking at a variety of things, such as, incidents, benefit utilization rate and trying to calibrate that to some of the blocks, where we've got some more experience on over time. But we're really too early in the process to talk about trends there. But I appreciate the question.

And then, just on the sort of deal approval process as it relates to China Oceanwide. Obviously, you've gotten all the approvals other than Canada and the China currency regulator. Is there a possibility that, given how long ago, you got U.S. approval that once you get closer, to closing assuming that everything is going through well, then the U.S. regulators actually ask you to sort of resubmit for approval or like just trying to get to like whether there's a soft or sort of implied expiration to the approvals. Because I'm assuming they're not open-ended. This can't go on for another couple of years, right?

Jimmy, it's Tom, I think your question and your perspective is correct. That the approvals were based on the original transaction summary and that did not contemplate the sale of -- potential sale of our Canadian business. So, the regulators will have to -- if we reach a definitive agreement, we'll submit that. They'll have to evaluate that. But obviously, we have a very close relationship with all those regulators. And they clearly understand where we are. And what we're doing given the situation in Canada. And I still would say that generally they are supportive of the transaction. But we will have to go. When we get to a deal, assuming we get there. We will have to review that with the regulators. And they may have opinions. But I don't foresee significant issues with any of them.

Okay, thanks. Good luck.

We will take our next question from Ryan Krueger from KBW. Please go ahead.

Hi. Thanks. Good morning. I just had a follow-up on the last question. Are these -- if assuming you sell Canada, in terms of reviewing that with the U.S. regulator, is this formal review process that would have to -- where the transaction would have to be re-approved? Or is it more informal?

That depends, I mean, each regulator will have to make their own judgments on that. They could either say this is not a material difference to the transaction. And not really require much of a review. They could also say this is an amendment. And review it as an amendment. And there could be some lets say this, changes the nature of the deal. And they want to do a full review. As I said, we are in touch with our team and people who run different businesses and Kelly and others. And so generally, I think those discussions are generally positive, but in the end, it really depends on the regulators, the valuation of the Canada sale and how it impacts the overall approval.

And would CFIUS have to rereview at all? Or is this more the U.S. insurance regulators?

So the CFIUS or the committee on foreign investment in the U.S. their focus was on national security issues. They didn't really have a focus on the deal the economics so much. And as you know, we went through an 18-month process with them. A lot of filing and refiling. We came up with a very strong mitigation plan that they accepted. We have them reporting to CFIUS and the monitor agencies which in our case is Treasury and Justice every month about the progress we're making on the mitigation plan. And my view is we're doing a good job. And so I don't really expect CFIUS will have a significant issue with Canada, because it doesn't really impact -- have any impact on the mitigation agreement, which is the real national security focus.

And then just last one. In terms of Canadian sale, the shares that USMI owns would the capital received remain within the U.S. mortgage insurance business from that sale? Or would you have the ability to dividend some to the holding company?

Yes. It's a great question Ryan. This is Kelly. In terms of the way the PMIER's ratio works for affiliate stock, we get about a 25% haircut on that. So as we think about the input on the PMIER's ratio, it will change or it will create excess capital basically. Now I mentioned in my prepared remarks for evaluating a dividend in the second half of the year [indiscernible] and that evaluation is kind of an independent evaluation of that just -- on the transaction and our management of our holding company cash liquidity and debt service.

Okay. Thank you.

We will now take our next question from Peter Troisi from Barclays. Please go ahead.

Thanks. My question was just answered. I appreciate it.

Ladies and gentlemen, as there are no further questions, I will now turn the call back over to Mr. McInerney for closing comments.

Thank you, Diane, and thanks all of you for being on the call today. We appreciate your continued investment and interest in Genworth and look forward to updating you in the future on the transaction and where we are with the next sale process.

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