Genworth Financial, Inc. (GNW) Q3 2019 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to Genworth Financial's Third Quarter 2019 Earnings Conference Call. My name is Lauren, and I will be your coordinator today. [Operator Instructions]. 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 third 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 in our most recent annual report on Form 10-K as filed with the SEC. This morning's discussion also includes non-GAAP financial measures that we believe may be meaningful to investors. In our financial supplement, earnings release and investor materials, non-GAAP measures have been reconciled to GAAP where required in accordance with SEC rules. Also, when we talk about results for our Australia business, please note that all percentage changes exclude the impact of foreign exchange. 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 plan to hold our 2019 Annual Stockholders Meeting on December 12 to comply with the New York Stock Exchange rules. Our 2019 proxy statement will be filed in the near future. In the event that proposed merger with Oceanwide is completed by December 12, 2019, our 2019 Annual Stockholder Meeting will not be held. And now I'll turn the call over to our CEO, Tom McInerney.

Good morning, and thank you for joining today's call. Genworth delivered another strong quarter of results, generating $123 million in adjusted operating income, driven by continued momentum in our U.S. mortgage insurance business and solid execution across our other platforms. I am pleased with the underlying strength and capital levels across our mortgage insurance businesses as well as the ongoing progress towards our strategic priorities in the U.S. life insurance businesses, all while we continue to work tirelessly towards closing the transaction with Oceanwide. Our long-term care insurance multiyear rate action plan continues to be a significant strategic focus and positive for Genworth. Year-to-date, rate action approvals have been strong, with $594 million of impacted in-force premiums, representing a weighted average premium increase of 43%. And at cumulative net present value basis since 2012, Genworth has achieved approximately $11.5 billion of approved LTC premium rate increases. We continue to see broad-based acknowledgment and support of the need for actuarially justified premium rate increases on our long-term current insurance policies from most state regulators. In line with this objective is the initiatives set forth by the NAIC long-term care insurance task force to develop a more consistent and timely national approach for reviewing long-term care insurance premium rates. This is critical as much as the experience is still just emerging, given the age of the industry and policyholders. I believe the enhanced focus on this extremely important initiative will significantly improve the future health of long-term care insurance industry as well as the success of Genworth's multiyear rate action plan. Let me now turn to an update on our ongoing transaction with Oceanwide. As previously discussed, in the absence of substantive progress with Canadian regulators regarding the Oceanwide transaction, Genworth and Oceanwide explored the sale of Genworth Canada to facilitate the completion of the transaction with Oceanwide. Following our thorough review of potential disposal options, we agreed to the sale of our 57% stake in Genworth Canada to Brookfield Business Partners, or Brookfield, for a total transaction value of CAD 2.4 billion or roughly USD 1.8 billion. We are extremely pleased that we reached an agreement with Brookfield for a stake in Genworth Canada. Brookfield is a highly regarded and investor in Canada, with significant expertise in the insurance and residential real estate sectors. The Brookfield transaction also satisfies the criteria we sought when reviewing our disposal options, which includes speed and certainty of execution and price. To that end, since announcing the transaction agreement, Brookfield and Genworth Canada have been in regular discussions with Canadian regulators regarding their review of the transaction. Last week, we announced that the Canadian regulators are seeking to ensure enhanced data protection of our Canadian customers' data during the transitional period after the closing of the sale of our interest in Genworth Canada, while Genworth continues to provide certain transition services to Genworth Canada. As part of the original agreement with Genworth Canada, when Genworth IPO-ed the business in 2009, Genworth must provide certain transition services to Genworth Canada for up to 12 to 18 months after any sale of our majority stake. A transition service agreement, or TSA, is very common in M&A transactions. For the separation of Genworth Canada, the ongoing services that Genworth will provide include IT infrastructure, human resources and finance and accounting-related support functions. Oceanwide and Genworth expect to close the Oceanwide transaction shortly after the Brookfield transaction closes, assuming the timely receipt of the relevant approvals and clearances. Therefore, Genworth will be owned by Oceanwide during a good part of the 12- to 18-month transition period. The Canadian regulators are asking Genworth, Brookfield and Genworth Canada to work together to develop a mitigation plan to ensure that the appropriate data protections are in place during this 12- to 18-month transition period post-closing. This includes leveraging the experience Genworth has from the enhanced data security program in our U.S. businesses, which is developed as part of the mitigation plan under the CFIUS review process. We are currently working as quickly as possible to provide the Canadian regulators with assurances that Canadian customer data will be secured during the transition period. Genworth and Brookfield have received all other required approvals to complete the sale of Genworth Canada and are targeting closing the transaction by the end of 2019. Following the October 21 elections, Canada's Liberal Party retained control of the Canadian government. As such, we do not expect any significant change in the personnel at the regulatory agencies responsible for our transaction's approval, and we will continue to work collaboratively with them. Oceanwide consented to the sale of Genworth Canada to Brookfield. In connection with our consent, Genworth and Oceanwide entered into a 12th Waiver and Agreement, extending the merger agreement deadline to not later than December 31, 2019. Genworth and Oceanwide previously received approvals from all necessary U.S. regulators and certain other international jurisdictions. Since then, we have provided updated information regarding the Oceanwide transaction to reflect the passage of time as well as the Genworth Canada disposition. Our regulatory approval from New York expired earlier this year, and we are in discussions with the New York Department of Financial Services to secure an appropriate reapproval. As you know, Genworth performs our annual assumption-related margin reviews of LTC, Life and annuities in the fourth quarter each year. We are in the process of conducting this year's review, and consistent with past practice, we are discussing certain LTC assumptions to be reviewed with our various state regulators. Based on these discussions, the New York Department of Financial Services has recently requested additional actuarial and LTC premium rate increase information regarding the LTC business in our New York subsidiary, Genworth Life Insurance Company of New York, or GLICNY. Then New York regulator is assessing the fourth quarter assumption of cash flow testing information for GLICNY concurrently with our consideration of a reapproval of the transaction. We are working with the New York to provide all the necessary information to them, so that they can finish their review to allow for a closing of the Oceanwide transaction by the end of the year. We will continue to manage the fourth quarter actuarial assumption reviews for GLICNY, GLIC and GLAIC in the same manner as we've done in past. Because of the potential timing of the Brookfield and Oceanwide transaction closings as well as the work of the NAIC task force, Genworth has engaged with our regulators and discussed these assumption reviews earlier than in past years. In addition to New York, Fannie Mae and Freddie Mac will need to reapprove the Oceanwide transaction, while some of our other regulators are currently reviewing the supplemental information to determine whether it has any impact on their existing approvals. Timing for confirming prior approvals or reapprovals, depend, in part, on the timing of the closing of the Canadian transaction. Following the receipt of all Genworth final regulatory approvals, Oceanwide will also need to receive clearance from China State Administration of Foreign Exchange, or SAFE, for the currency conversion and transfer of funds. Oceanwide has been very patient and cooperative as it works through the Canadian sale process, and our regulatory approvals are strong testament to their commitment to the Oceanwide transaction. Oceanwide also remains committed to the $1.5 billion post-closing capital investment plan, which it intends to make in 3 equal installments, subject to the receipt of the required regulatory approvals or clearances. Based on our target to close the transaction by the end of 2019, the 3 tranches are expected to be made by the end of the first quarter of 2020, the third quarter of 2020 and the first quarter of 2021. The timing of the tranches is ultimately dependent on the timing of the closing of the Oceanwide transaction. I would also like to thank our shareholders and other stakeholders for your patience as we continue to work towards closing the transaction. We fully understand how challenging it has been for our shareholders and other stakeholders, given that Oceanwide and Genworth signed the merger agreement 3 years ago. Our Board continues to believe the Oceanwide transaction is in the best interest of our shareholders, and we remain committed to doing everything possible to bring this transaction to a successful conclusion as soon as possible. At the same time, Genworth continues to deliver solid performance and is well positioned to address its upcoming debt maturities, given the steps we have taken to improve our financial flexibility. Now I'll turn the call over to Kelly, who will provide a review of our financial results, key drivers of performance as well as discuss our assumption review process and our liquidity and capital positions.

Thanks, Tom, and good morning, everyone. Today, I will cover more detail on our third quarter financial results and key drivers. I will also discuss capital levels in our businesses and provide updates on cash and flexibility at our holding company. As noted in our press release and quarterly financial supplement released last evening, the planned sale of Genworth Canada has met the requirements for held-for-sale accounting treatment and has been reported as discontinued operations. Accordingly, Genworth Canada's financial position, results of operations and cash flows have been separately reported and all prior periods have been re-presented to reflect this. These accounting rules also required us to record an estimated loss in the current period on the planned sale to the extent the estimated net cash proceeds are less than the carrying value in U.S. dollars of the business sold. While the purchase price was slightly higher than our equity in our Canadian business, as shown on our balance sheet, given the exchange rate of the Canadian to U.S. dollar, we recorded a loss due mainly to the currency translation differences recorded as a part of the accumulated other comprehensive income, or AOCI, that have arisen over time. The loss from discontinued operations attributable to Genworth shareholders in the quarter was $110 million, reflecting the net estimated sales proceeds less cost of sale as well as quarterly results from Genworth Canada. The other adjustments included as a part of discontinued operations include the portion of corporate overhead previously allocated to Genworth Canada, interest on the term loan that secured by our ownership interest in Genworth Canada and taxes directly related to the Canadian business. These impacts are reflected in corporate and other and quantified in the quarterly financial supplement and the investor presentation. Let me now shift to the current quarter's financial performance, focusing most of my comments on continuing operations. We reported net income to Genworth shareholders for the quarter of $18 million, income from continuing operation of $128 million and an adjusted operating income of $123 million. Our U.S. and Australian mortgage insurance businesses continue to perform well with strong loss ratio performance in the U.S. and solid capital levels on both platforms. Our U.S. Life results were mixed, driven by continuing good in-force rate action results in long-term care insurance, offset by accelerated amortization of deferred acquisition costs in Life and an unlocking charge due to low interest rates for single premium immediate annuities. In U.S. MI, overall results continued to reflect solid fundamental, including low interest rates, steady economic growth, low unemployment and stable housing prices. USMI's adjusted operating income was $137 million in the quarter, which was down $10 million sequentially and up $19 million versus the prior year. The third quarter reported loss ratio was 11%, which is up 11 points from the prior quarter and flat versus the prior year. Note that the prior quarter's reported loss ratio of 0 included a reserve factor update, which reduced that period's loss ratio by 5 points. New delinquencies for the quarter were up on a sequential basis, reflecting seasonality and up in counts year-over-year with the larger in-force portfolio. Favorability in net cures and aging did moderate from last quarter, driven by seasonal trends. Primary insurance in-force in USMI continues to grow, reaching its all-time high of $186 billion at the end of third quarter of 2019. This was up 14% versus last year and reflects very strong levels of the new insurance written, offsetting lower persistency levels, driven by lower mortgage rates, increasing refinancing activity. The U.S. mortgage origination market remained strong and was up versus the prior quarter and prior year from a higher purchase and refinance originations market. Our flow new insurance written, or NIW, for the quarter was $18.9 billion, up 20% sequentially and 83% versus the prior year. Once again, we expect our USMI third quarter 2019 estimated market share to have remained strong. We continue to manage to an overall return expectation in the mid-teens on the 2019 book year. Moving to Australia. Our flow NIW business levels were up 27% versus the prior quarter and 32% versus the prior year, primarily from higher mortgage origination volume from certain key customers. The adjusted operating income was $12 million in the quarter, which was down $1 million sequentially and $5 million versus the prior year. The U.S. GAAP loss ratio in the quarter was 36%, up 2 points versus the prior quarter and up 5 points versus the prior year, primarily from the lower earned premiums from portfolio seasoning. On Australia's IFRS accounting basis, the loss ratio of 53% in the quarter and the year-to-date loss ratio of 54% is in line with full year 2019 loss ratio expectations of 45% to 55%. Consistent with prior years, in the fourth quarter of 2019, our mortgage insurance business in Australia is expected to complete its annual review of its premium earnings pattern. Turning to our U.S. Life insurance segment. In long-term care, we made no significant adjustments to assumptions and methodologies to our claim reserves, given that our recent experience on our current claims, in aggregate, was in line with expectations. Regarding financial performance for the quarter for long-term care, claim terminations were lower versus the prior quarter, which is generally consistent with seasonal patterns for the second half of the year. Compared to the prior year, claim termination rates were in line. New long-term care claims, following the updated utilization assumption after last year's completed claims reserve review, continued to reflect higher severity. Additionally, we are seeing higher claim counts on our larger Choice 1 and Choice 2 blocks, which we also expect to continue as the blocks age. The overall financial benefits of the in-force rate actions for long-term care, particularly the reduced benefit impacts, as illustrated on Page 9 of the investor deck released this morning, continue to be strong. This is primarily related to the large rate increase approvals in 2018 and earlier this year, which are now being implemented. As we noted last quarter, these rate action approvals included expanded reduced benefit and stable premium options, which are being selected at a higher frequency by our policyholders, as many of these policyholders have been subject to multiple rounds of increases. We expect a meaningful level of reserve releases from long-term care benefit reductions, associated with the premium rate increases to continue as we go into 2020 and implement the larger in-force rate actions achieved in 2018 and 2019. However, it is difficult to predict policyholder behavior, and the level of reduced benefit options may vary from quarter to quarter in the future. As we discussed on prior calls this year, as of year-end 2018, we estimated that we would achieve approximately $6 billion, on a net present value basis, in additional future approved rate actions under actuarial assumptions that were updated in late 2018. Our year-to-date 2019 approvals on a net present value basis, exceeded $1 billion of the $6 billion amount. Our multiyear rate action plan refined last year, assumed that it will take approximately 10 years to obtain and implement these remaining approvals. We are currently evaluating our actuarial assumptions in connection with our fourth quarter cash flow testing and loss recognition testing review. We are particularly focused on updated experience on our Choice 2, a newer policy series that is just developing with more credibility as more policyholders have gone on claim. Any updates to our assumptions, including our view of long-term interest rates, will likely increase the future amount of long-term care premium rate actions needed. Choice 2, with premiums of approximately $970 million annualized, represents about 37% of total long-term care individual premiums and has an average attained age of between 69 and 70 years old. For comparison, the average attained age on our oldest blocks Pre PCS, PCS I, the PCS II are 88, 85 and 80, respectively. We have a longer runway for collecting additional premiums on Choice 2 and the newer blocks from LTC rate actions, which allows for smaller and more manageable premium increases for our policyholders, that is significantly higher in net present value benefit for the approved premium increase. Our nationwide cumulative average rate increases for Choice 2 is approximately 64% versus 200%-plus for some of our older legacy product series with some states approving 300%-plus on some of the legacy products. Our actuarial review for loss recognition and cash flow testing for long-term care in all of our products are still in progress and will be disclosed as a part of our fourth quarter earnings disclosures. These reviews will consider a number of assumptions, including expected claim incidents, benefit utilization, mortality, interest rates and in-force rate actions, among others. We are also discussing long-term care assumptions, with our domiciliary regulators: Virginia, Delaware and New York during the fourth quarter, as our reviews progress, as we have done in the past. Also, as Tom noted in his remarks, we did start these discussions earlier this year, given the overall timing of the Brookfield and Oceanwide transaction closing. Turning to Life Insurance. Our results included $10 million after tax of accelerated DAC amortization related to higher ceded reinsurance rates. Overall mortality in Life for the quarter was lower sequentially and versus last year. As we discussed last quarter, the term life business continues to be negatively impacted from higher lapses, primarily associated with the large 20-year level premium term life insurance blocks written in 1999 and 2000, entering their post-level premium periods. The accelerated term life insurance DAC amortization, a noncash impact, primarily related to these term life lapses reduced earnings by $38 million, which is an additional $6 million after tax versus last quarter. We expect amortization to remain elevated throughout 2019 and 2020 as more of this business enters the post-level premium period and lapses accelerate. As we are finalizing our review of assumptions on our Life business, we are focusing on interest rates given the significant decline of around 100 basis points on the 10-year treasury between December 2018 and the end of third quarter 2019. We are currently analyzing all of our mortality, persistency and interest rate assumptions, and most, other than interest rates, are largely in line with prior year assumptions, when taken as a whole. I will share some perspective on how the interest rate environment impacts our different business lines and include a sensitivity related to universal life in a few moments. In our fixed annuity products, we saw lower variable investment income and higher reserves due to lower interest rates versus the prior quarter. We had an after-tax loss recognition charge of $13 million during the quarter, related to single premium immediate annuities, also driven by the significant decline in interest rates. Our single premium immediate annuities are tested for loss recognition quarterly, given that there is no margin in this interest rate environment. Our adjusted operating loss in Corporate and Other, which has been restated in prior periods, as I discussed earlier, was $35 million for the quarter. This was improved versus last quarter due primarily to favorable tax timing and other tax adjustments of approximately $12 million and lower expenses. We anticipate a benefit from tax timing of $4 million to occur in the fourth quarter. Now turning to capital levels. Our U.S. and Australian mortgage insurance businesses continue to maintain very strong capital positions. In USMI, we finished the quarter with a PMIER sufficiency ratio of 129%, up from 123% last quarter and strong cash flows and the execution of an excessive loss reinsurance transaction on a portion of the last year for the 2019 book year during the quarter. The PMIER sufficiency level increased to over $850 million above the level of required assets as of September 30, 2019. As noted in our press release, we received a $250 million ordinary dividend from USMI in October. We expect USMI to be able to pay an annual dividend going forward, based on our current plans, which assumes favorable trends in performance continue within the business as well as macroeconomic factors such as a strong U.S. housing market and employment levels and strength in the overall U.S. economy. As we look forward, we will assess the appropriate amount and timing of future dividends based on a variety of factors, including economic factors, regulatory constraints, business performance, and we will also consider the Oceanwide transaction and related capital plan. Our Australia MI business ended the quarter with an estimated capital ratio of 198%, down from 208% last quarter, which is in excess of AUD 475 million, above the high end of the prescribed capital amount, or PCA, management target range of 132% to 144%. The decrease in Australia's capital ratio, primarily reflected dividends paid during the quarter. To further optimize its capital position and to bring the PCA closer to management's target range, our Australian business after receiving approval from its local regulator, APRA, today declared a special dividend of $0.242 per share for an aggregate amount of approximately AUD 100 million. The dividend is payable at the end of November and Genworth holding company will receive approximately $34 million on a U.S. dollars basis, based on our 52% ownership percentage in the current foreign exchange rates. Genworth Canada's special dividend announced in early September was paid on October 11, with net proceeds to the holding company of $36 million and $15 million to USMI. The special dividend proceeds will reduce the previously disclosed net proceeds from the Brookfield transaction of approximately $1.8 billion by a similar amount, given the fixed price agreement that is adjusted for any special dividends paid. We expect capital in Genworth Life Insurance Company, or GLIC, to end the third quarter at approximately 200% of company's action level of risk-based capital, which is up slightly from the second quarter. U.S. Life statutory income in the quarter was positive, benefiting from earnings in long-term care from in-force rate actions and in-fixed annuities. This statutory profitability offsets the required capital increase in variable annuity from lower interest rates and in long-term care from continued claims development. I want to remind investors that as a part of our earlier agreement with Delaware regarding the Oceanwide transaction, Genworth will contribute $175 million to GLIC. This contribution to GLIC is a special commitment made as a part of the Delaware approval process and in conjunction with the proposed transaction with Oceanwide. It is our intention to manage all of our U.S. Life entities on a stand-alone basis, with no other future plan to infuse capital in these businesses nor extract dividends. The U.S. Life business will rely on their consolidated statutory capital of approximately $2 billion, which did increase slightly during the quarter; prudent management of in-force blocks; and the actuarially justified rate actions to satisfy policyholder obligations. Moving to the holding company, we ended the quarter with $366 million in cash and liquid assets, down from $403 million from the prior quarter. During the quarter, total net dividends to the holding company were $62 million, which included proceeds from share repurchases. Intercompany tax payments of $6 million, continue to be a source of cash to the holding company. Offsetting these inflows were interest payments of $72 million, additional cash collateral of $23 million primarily on our hybrid debt interest rate swap and $10 million in other miscellaneous items. We expect our fourth quarter cash position to benefit from USMI's dividend of $250 million, Canada's special dividend of $36 million and Australia's announced special dividend of $34 million. We do have an option to execute on Brookfield's bridge loan, if the Canada sale has not been approved by regulators by tomorrow. We will continue to assess progress with the Canadian regulators and the overall Oceanwide deal to determine whether we draw on these funds at an appropriate time. Now I want to cover a topic that many investors and most insurers are watching carefully, which is the recent drop in long-term interest rates and expectations for how long these low rates may persist. During the quarter, we saw the 10-year treasury fall from 2% at the end of the second quarter to 1.68% at the end of third quarter and fall further into early October, only to rebound since then to around 1.8% last week. Genworth is somewhat unique in the insurance industry, given our mix of businesses as we have some businesses that benefit from low rates while others are negatively impacted. In our U.S. mortgage insurance business, low interest rates positively impact new business levels through an expanded originations market, while some of this benefit may be offset by lower levels of persistency and investment income. In our U.S. Life business, lower rates are generally negative and impact the business in multiple ways, both in the current period, as we saw this via unlocking charge this quarter; and in future periods, with lower investment income on our fixed income portfolio. We also incorporate our view of future interest rates in our other actuarial assumption updates that we are currently in the process of completing. Related to our Universal Life products, if interest rates stayed near their September 30 levels, it could accelerate our DAC amortization by between $100 million and $150 million before taxes. This amount is not incorporated in the other assumption changes or offsets, and we will update you once our process is complete in connection with announcing our fourth quarter results. We've disclosed some of our other discrete interest rate sensitivities in our annual 10-K, which I encourage investors to review. We will continue to closely monitor the low rate environment as we move forward. In closing, it was a strong financial quarter for Genworth. We remain focused on closing our sale of Genworth Canada to Brookfield and then completing the Oceanwide transaction as soon as possible. Operationally, our mortgage insurance businesses continue to execute on their priorities and are performing very well financially, with solid earnings, strong capital levels and significant dividends to the holding company. We remain focused on the operational progress, including our LTC rate action plan and other strategic actions intended to improve and help stabilize our U.S. Life insurance businesses. With that, let's open it up for questions.

[Operator Instructions]. We'll take your first question from Ryan Krueger with KBW Brokerage.

In terms of the reapprovals that you need, is -- does that include CFIUS? And are you having any -- do you need to have any additional interactions with them?

Ryan, good question. Comes up a lot. We do not need any further approval from CFIUS. They approved the deal given that they are comfortable with the mitigation plan, and their only national security issue was on protecting the U.S. customers', individual customers' proprietary information. They were satisfied that the mitigation plan does that. So from that perspective, we're -- CFIUS has completed their review. It has not objections, and that remains the case.

And then for Kelly, on your comments around Choice 2. I guess are you -- can you give any more detail there? Are you [indiscernible] claim data is coming in that it's developing negatively, but that you believe that can be offset by future premium rate increases?

Yes. That's a great question, Ryan. When we look at our Choice 2 block, and like I mentioned in my prepared remarks, the average age of that policyholder is like between 69 and 70. I think it's like 69.6. We've had about 11,000 total claims. Of those 11,000 total claims, about 5,000 of those policyholders are still on claims. So we're definitely watching this experience. Because we've had different underwriting for those blocks of business, we have expected their experience to be better, which we've seen it just is trending -- incidence is trending a little bit higher than our expectation for some of the older ages, particularly the 75-and-above ages, while it's a little bit better for the below 75-year-old. So we do anticipate being able to -- we have very few rate actions on the Choice 2 block and newer blocks since then. So we're currently evaluating that on a state-by-state basis and would anticipate that we could offset much of that with rate increases, but the work is still underway. I appreciate the question.

Ryan, I would just add to Kelly's comments. I agree with what you said. We have had a number of conversations, and I've given presentations to the NAIC task force that we talked about. And one of the things that I have noted to them is for Choice 2 and the newer blocks, while it's arguable to -- is 11,000 claims on 400,000 lives statistically significant or not. One of the things that they've learned and we've learned over the last many years is applying for premium increases sooner is better for policyholders because the overall increase is less, if you go sooner because you collect more premiums along the way. It's better for the regulators because they ultimately have to approve lower ultimate premium increases. And Kelly gave you the statistics that the average premium increase in some of the other blocks is 200% on our PCS I block, for example, 20 states have given us more than 30%, including 9 of the top 20 states. So I do think that given those very high premiums, there is a view of this NAIC task force in general that going sooner to get premium increase is better than waiting. So I think the advantage on Choice 2 that we have, and then Kelly made the point is, we think it's better for policyholders because the ultimate premium increase is lower. And then for every premium dollar approved, because we are collecting it over a longer period of time given the younger age of the Choice 2 policyholders, it's better for us. And so I do think the NAIC task force, and I -- and we've mentioned it a number of our times over the last several calls, I think, it's critically important, and I do think generally, that task force, which is composed of 36 states and 36 commissioners, and there is an actuarial subgroup that we're also working with, composed of, I think, it's 10 actuaries, led by the Minnesota Chief Actuary. And so I do think both the regulatory community, the NAIC as well as all the insurance companies that have these blocks are making progress, given all that we've learned over the last 5 or 6 years.

Yes. And Tom mentioned -- Ryan, and when Tom mentioned the 30% on PCS I, I think he meant 300%.

300%. Yes.

Yes.

Our next question comes from Jimmy Bhullar with JPMorgan.

So I had a couple of questions. First on the Canadian approval process. How are your conversations or sort of lack of conversations with the regulators different now then the first go around when you were trying of include the Canadian business as part of the sale to Oceanwide? And then I have another one. But...

Jimmy, that's a good question. We really did not have much interactions previously before we announced the sale to Brookfield. I think the OSFI and the other regulators have a very positive view of Brookfield and Brookfield as the acquirer, and they also have a positive view of our Genworth Canada businesses. So we are having much more detailed conversations. And as both Kelly and I mentioned, under our -- the original IPO shareholders' agreement, Genworth or the parent agreed to provide certain transition services to the extent we sold our majority stake. So we're honoring that commitment. And then OSFI is working with Brookfield, Genworth Canada and Kevin Schneider, I maybe ask Kevin to make a comment, is leading that process from Genworth's perspective. But I think it's going well. I think OSFI has a favorable view of both Brookfield and Genworth Canada. They have been regulating both entities for quite some time. So I do think it's very different and more engaged discussion between the regulators. Kevin, you work on that daily. Do you have anything you want to add to that?

I think you characterized it well, Tom. We're in constructive dialogue and working to try and solve any concerns related to the transition service agreement period. And we're encouraged that we'll be able to work through that.

And then on the long-term care business, you've had a couple of quarters of pretty good earnings in that business. I think, and obviously the results are benefiting from the price hikes. To what extent are the price hikes driving the better margins versus maybe just better experience? Because I think prior to the last two quarters, you'd had losses, four out of the last five quarters. So how much of this is just like a positive aberration in claim trend versus maybe the benefit of price hike starting to flow through?

Jimmy, another great question. I would say, one thing, I don't think that the market gives Genworth enough credit for -- we've achieved now in our net present value $11.5 billion of premium increase since 2012. It's pretty substantial. I would say that in 2018 and in the first half of 2019, we received very substantial, in some cases over 100% approvals, from our top 10 states. And those approvals are now being implemented. And they are implemented on the policy anniversary date. So it takes several years for all of those to come through. Kelly also mentioned this in her remarks, we're seeing now that this is the third, fourth, fifth round of premium increases, particularly in the older books of business, a number of policyholders who may have taken the full premium increase earlier are now taking more reduced benefit options. And those reduced benefit options clearly are significantly helpful from an earnings perspective because instead of -- they take the full premium increase, we get the benefit of that over the long run, if they take a reduced benefit, the net present value is higher and that contributes to the earnings. So I do think, and Kelly mentioned this, that for the balance of '19 into 2020, I think those very large premium increases on -- with the top 10 states, and we're talking about large increases on about 30% of the overall in-force premiums, I think you will see that benefit going forward. Now obviously, offsetting that is, we're seeing higher claims, and we've obviously made some assumption changes that go the other way. So all of that is in balance. But I do think that the benefits of these significant increases, and particularly given that is the third, fourth and fifth round of the reduced benefits, if you go back to '14 or '15, about 90% of the policyholders were taking the full premium increase. Today, it's about 70%, 71%, if you do cumulatively. So I think that's just been a significant -- provides a significant benefit to our earnings. And I think we'll see that continue. And we're still hoping to apply for significant additional premium increases, particularly on the Choice 2 and newer blocks. I don't know, Kelly, if you want to add anything to that.

Just 1 point, I would say, to give you a sense of the metrics around that. When we first were implementing rate actions, so let's say, 2012 through 2016, about 90% of the policyholders were paying a full premium increase. And maybe 6% to 7% were doing reduced benefits and 3% to 4% were taking nonforfeiture options. And that really has shifted. If we look at our cumulative metrics to date, those that have always paid the full increase are down to the 70-ish percent, around 71%, reduced benefits is about 20% and nonforfeiture option is about 9%. So that definitely has been driving it as people have seen the policies increase and really have to just rationalize the coverage that they have got compared to the premiums that they're paying.

Our next question comes from Tom Gallagher with Evercore ISI.

First question is, can you unpack the increased severity in long-term care claims you're seeing? Meaning, is that coming from longer claim durations or is that larger claim amounts? And also the increased severity side, is that -- is the increase pretty consistent with prior years or has that been accelerating?

That's a great question, Tom. I'll take that. Really, I think, and I know you've talked to the team briefly last night as well, but as we're looking at increased severity, it really is the function of our assumption update last year in 2018. So every new claim that goes on the books is going on at an assumed amount that's higher than we had previously put up. So really it's just a function of the assumption change we made last year, the expectation for the average claim depending on a lot of different factors, including what their daily benefit is, and each claim just happens to increase the severity due to that math. The thing I would say is as we see people with higher daily benefit amounts go on claim, those claims will be higher. Because we see that people do try to maximize some of those benefits as they're going on claim, and that's one of the reasons we do focus on reduced benefit option, so that we align our claims experience with the policyholders and they have an incentive to conserve benefits when they can when it's helpful for them.

And Kelly, is it fair to say though you're not seeing an acceleration of claim severity, meaning, it's getting worse, it's more -- sounds like it's more the model adjustment flowing through?

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

Okay. And then the comments that you made on the NYDFS, it sounded like there is more involvement there having in the actuarial review this year. Can you expand a bit on what's going on there?

Thomas, it's a good question. It's always difficult to answer those questions because we're being careful, I think, all the regulators assume that our discussions are being done in private as we're negotiating. So I have -- I'm a little bit limited. But I would say we've always had good dialogue with New York. I think New York is aware that, as we've given them the update on Choice 2 and the newer blocks and some of the issues around severity on the over blocks, we're going through all of that. The obviously -- and we assumed that -- just because of timing, and given the Brookfield sale that we didn't expect we'd have to sell Canada. So that has obviously delayed the time line. So we knew we are going to run into concurrently, they were reviewing the reapproval because their approval expired. And we're going to be going through the fourth quarter review. So I would -- and also -- and I think I said this in my remarks, we're having a lot more dialogue, regular dialogues with this NAIC task force 36 commissioners, now New York is not on that. But we're just having a lot more conversations, day in day out with all the regulators on all of this. And so, I would say, we're talking earlier to New York and the other regulators because of all these reviews that are being done at the NAIC level. And I do think New York has a better understanding of their blocks. Obviously, New York is a different situation, GLICNY versus GLIC with its 49 states. And while GLICNY, it's only New York. So it's actually a little bit easier to talk to New York. But part of this review is what are the assumptions that Kelly and I and the team are considering making how to -- if we make any of those assumption changes how does that impact premium increases, particularly in New York's case, the premium increases that New York would have to approve. So I think it's good discussions. It's negotiation process. I can't get into more specifics than that because I think that would be unfair to the regulators for me to go out in front of the discussions. But hopefully, that gives you a sense that these are ongoing dialogues, there's much more discussion, I think, there is much more openness on the part of the regulators to grant increases today than there were. So all of that is good. But nevertheless, we're going to have to go through the next month or so with New York finishing up the process with them. So we hope to still close Oceanwide and Genworth to close the mixed sale, or the sale of Genworth Canada, and then the Oceanwide transition close by the end of the year. That's still our objective, and we think we have a shot at doing that.

Okay. And just one final one, if I could. The -- maybe related to your last comment about the NAIC, but the -- our understanding is regulators are spending more time focused on the baseline morbidity assumptions, that from some of the information they've gotten from AG 51 disclosures. Is that -- have you had discussions with regulators on that topic. And do -- would you -- is that a key part of the model that you think might be potentially changed with year 2019 actuarial review?

Tom, another good question. There is a sense, I think, by the market and maybe the analyst community, that this morbidity review is a new development. It's really not. I mean, we actually had morbidity improvement, I would say, less conservative in 2013 and 2014. In 2014, we made significant changes on morbidity. We significantly shortened the years that morbidity improvement applies from, I think, in '14 we went from 30 years to 10 years. We still believe that our specific data, we now pay to about 280,000 claims. So on those 280,000 claims, we believe our morbidity assumption, which we disclosed and that's been picked up by a number of outside reporting parties, including rating agencies, that -- we assume 1.6% morbidity improvement for 10 years. It's less -- it's more conservative on statutory because of the statutory pads or provisions for adverse deviation. So for statutory, it's -- the assumption is more conservative than that. But our 40-year track record justifies those assumptions. And so while we're looking at this as part of the review, and I don't want to get ahead of our -- Kelly and myself and the team making the final decisions on that, but I would -- for us, for Genworth, given our record, I would say that the morbidity assumption that we have is supported by our claims data. That may or may not be the case for the porters. So other parties are making different decisions. But clearly -- and you made point, Tom, it is correct that the NAIC and the states given AG 51 which is the general NAIC provision related to how you're supposed to conduct these actuarial reviews under AG 51 that is 1 area that they look at. We believe we have pretty strong data supporting at this point the assumptions we make on morbidity improvement.

Okay. And just to clarify, I was referring more less so to the improvement assumption embedded in the morbidity assumption, more on the actual baseline assumption itself, which I understand is the newer part of the development. Because I think last year there was much more emphasis on whether there is improvement embedded in the assumption. I think now it's actually on the baseline assumption itself. So I don't know, just wanted to clarify that point.

I think, Tom, it's both. It's both the baseline as well as what you're assuming from morbidity improvement. There are competitors who have changed and there are 1 or 2 that eliminated morbidity improvement. And so because they did it, the regulators and the NAIC would naturally ask all of us what our view is but we -- because of the size of our book, the fact that we paid 208,000 claims in the last 4 years, about $18.5 billion of claim payment, we do have probably more actuarial claim information than others do. So we do believe that our experience supports both the baseline and the morbidity improvement assumptions that we make.

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

Could you talk a little bit about the NIW trend in the USMI business this year? You've had a resurgence in market share, obviously, shift to risk-based pricing. What -- I guess talk a little bit about your kind of market recovery this year. And then particularly for this quarter, did the industry seem to have an unusual penetration level of refi versus previous periods?

Yes, Geoff. Kevin, I'll start with the last portion of that question. Penetration levels were up significantly, I would say, for -- reasonably for the industry. And I think part of that is there was some significant improvement in the traditional refinance penetration levels. And I think what we're seeing is some of the loans that are being refinanced are more recent loans. So there are newer loans and I haven't -- and they haven't had the opportunity to amortize or pay down to the levels of some of the older books where we have experienced refinancing before. So yes, those refinancing penetration levels were absolutely up on the quarter. For the USMI business, we feel pretty good about our share position, particularly, in light of our ratings. I think it's a result of the combined success of our customer-facing value propositions that we're delivering to our customers, where we're really been focusing on differentiating our underwriting service levels in overall and we got strong relationships, and we have been competitive from a pricing guideline standpoint with the rest of the industry. The market continues to be competitive market, but -- and our share is influenced by those overall go-to-market strategies that include both our recent rollout of our risk-based pricing engine, GenRATE, as well as ongoing selective participation in some forward commitment transactions. I think in the third quarter, based upon -- I can't really call where our share is in the third quarter based upon the releases of the 3 competitors, including Genworth, that have reported so for because -- but it does look like we have a pretty big market. And we'll have to see when the balance of the industry reports to see where share levels overall sort out. But we feel pretty good about ours. And I think where we're -- the other place for winning is -- we got a strong balance sheet in that business, the PMIERs levels are quite strong. And at the end of the day, our customers are reacting to the strength of that capital level.

In previous quarters, I think other companies' commentaries have been competitive but still fairly rational, would you still think that's fair?

Overall, yes, I do believe that's fair. As I think Kelly announced on the call, we're still targeting and achieving mid turn teens -- mid-teen returns, excuse me, that's a tongue twister, that was written this year. But I think overall the market is fairly rational, but it's competitive, you go to fight every day to win your share.

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

Thank you very much, Lauren, and thanks to all of you for your time and questions today. I think you asked some very good questions and, of course, we appreciate your continued investment and interest in Genworth, your patience as we're going through this deal process with both the sale of Genworth Canada Brookfield and then the overall transaction with Oceanwide. So we appreciate you working with us as we hopefully get all those done by the end of the year, which is our objective, and we think we are in good shape to do that. And have a great day.

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