U.S. Markets close in 5 hrs 7 mins

Edited Transcript of GNW earnings conference call or presentation 31-Jul-19 12:00pm GMT

Q2 2019 Genworth Financial Inc Earnings Call

Richmond Aug 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Genworth Financial Inc earnings conference call or presentation Wednesday, July 31, 2019 at 12:00:00pm GMT

TEXT version of Transcript


Corporate Participants


* Kelly Lee Groh

Genworth Financial, Inc. - Executive VP & CFO

* Thomas Joseph McInerney

Genworth Financial, Inc. - President, CEO & Director

* Tim Owens

Genworth Financial, Inc. - Director of Finance


Conference Call Participants


* Jamminder Singh Bhullar

JP Morgan Chase & Co, Research Division - Senior Analyst

* Peter Vincent Troisi

Barclays Bank PLC, Research Division - Director & Senior Analyst

* Ryan Joel Krueger

Keefe, Bruyette, & Woods, Inc., Research Division - MD of Equity Research




Operator [1]


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. (Operator Instructions) As a reminder, the conference is being recorded for replay purposes. (Operator Instructions)

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


Tim Owens, Genworth Financial, Inc. - Director of Finance [2]


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. In this morning, our earnings presentation was posted to our website and will be referenced during our call. We encourage you to review all of these materials.

Today, you will hear from our President and Chief Executive Officer, Tom McInerney; followed by Kelly Groh, our Chief Financial Officer. Following our prepared comments, we will open up the call for a question-and-answer period. In addition to our speakers, Kevin Schneider, Chief Operating Officer; and Dan Sheehan, Chief Investment Officer, will be available to take your questions.

During the call this morning, we may make various forward-looking statements. Our actual results may differ materially from such statements. We advise you to read the cautionary notes regarding forward-looking statements in our earnings release and related presentation as well as the risk factors of our most recent annual report on Form 10-K as filed with the SEC.

This morning's discussion also includes non-GAAP financial measures that we believe may be meaningful to investors. In our financial supplement, earnings release and investor materials, non-GAAP measures have been reconciled to GAAP where required in accordance with SEC rules.

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.


Thomas Joseph McInerney, Genworth Financial, Inc. - President, CEO & Director [3]


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. USMI 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, USMI 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 our share in the U.S. market.

USMI's 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 its 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.

Execution against our multiyear rate action plan remains a high strategic priority for Genworth. As shown on Slide 10, year-to-date, we have received 56 state approvals, which impact $467 million of in-force premiums with a weighted average increase of 49%, reflecting a very strong progress under our rate action plan.

On a cumulative net present value basis since 2012, Genworth has achieved approximately $11.5 billion of approved LTC premium rate increases. We have made substantial progress as most state regulators now acknowledge the need for significant actuarially justified premium increases of long-term care insurance policies. Genworth and I are now actively engaged with a new National Association of Insurance Commissioners, or NAIC, long-term care insurance task force, which is comprised of approximately 35 state insurance commissioners.

The goal of the task force is to develop a more consistent national approach for reviewing long-term care insurance premium rates. The new approach is expected result in more timely approvals of actuarially appropriate increases and the elimination of cross-state rate subsidization. Although most states now agree with the need for these increases, there are still some states that are behind on approving rate actions. I look forward to working with the NAIC on this extremely important industry-wide initiative, while continuing to focus on achieving Genworth's long-term care rate action goals.

Let me now turn to review the recent events with respect to our ongoing transaction with Oceanwide. On June 30, Genworth and Oceanwide entered into an 11th waiver an extension of the merger agreement to a date not later than November 30, 2019. This waiver in agreement also allows Genworth to solicit interest for a potential sale of Genworth Canada, a mortgage insurance business.

Given the absence of any substantial progress in our discussions with Canadian regulators, with respect to the approval of the Oceanwide transaction, we concluded that exploring disposition options for Genworth Canada was in our best interest to successfully complete the Oceanwide transaction.

Although Genworth Canada is one of our top-performing businesses, the lack of feedback from Canadian regulators about the review of the Oceanwide transaction was risking our ability to close the transaction, which remains in the best interest of our shareholders and other stakeholders.

There are different disposition options for a publicly traded company like Genworth Canada, including selling our 57% interest through a privately negotiated sale with a buyer, selling down our shares on the open market, while coordinating the sale of our 57% interest with the sale of the remainder of the ownership interest in Genworth Canada held by others to one buyer. Our 3 key priorities in identifying a buyer are to: achieve the best price, speed of execution and the acceptability of the buyer to Canadian regulators.

We believe the price realized through a privately negotiated sale of Genworth's 57% ownership position or a whole company transaction would be superior to an open market sale. While selling on the open market would increase the speed at which we could sell down our position in Genworth Canada and likely eliminate the need for change of control approval by Canadian regulators, we would likely sell our shares at some discount to the current share price versus the opportunity to receive a premium for Genworth's controlling ownership in a private sale or whole company sale.

Since our announcement, we have received expressions of interest for a privately negotiated sale of the Canadian business. We are conducting thorough due diligence on interested buyers to ensure that any potential buyer has the qualities required to increase certainty of closing in a reasonable time frame, particularly regarding the likelihood of approval from Canadian regulators.

Upon identifying a suitable transaction with Genworth Canada, Oceanwide will have the right to accept or reject the terms of the disposition. Should Oceanwide accept the terms, we expect to close the sale of Genworth Canada as promptly as possible and to close the Oceanwide transaction concurrently or promptly thereafter.

The sale of our interest in Genworth Canada would involve obtaining the required regulatory approvals and the time line of such sale will be mostly dictated by the regulatory review process once we have an agreement with the buyer, but we are moving as quickly as possible to expedite the transaction process. This includes our recently announced bond consent solicitation, which we have launched to create an express authorization for the sale of all or part of our non-U. S. mortgage business or assets, including Genworth Canada under our bond indentures.

As I noted earlier, Oceanwide also has the right to reject the terms that have agreed upon sale of Genworth Canada. If that were to be the case, Genworth would evaluate its options at the time and the parties would each have the right to terminate the merger agreement. While we are pursuing this sale in an effort to close the Oceanwide transaction as soon as possible, we believe that the sale of Genworth Canada would also allow us to reduce our outstanding indebtedness and increase our financial flexibility, whether or not the Oceanwide transaction is completed.

We continue to work hand-in-hand with Oceanwide, and they have been extremely cooperative and supportive of our overall product for Genworth Canada today. We will continue to work with Oceanwide as we move through this sale process. I believe Oceanwide's patience and cooperation to the Canadian regulatory review process and now the sale process is a testament to the commitment to the transaction and our continued belief that this transaction is in the best interest of all stakeholders.

Moving to other elements of the Oceanwide transaction process. Genworth and Oceanwide have received all necessary approvals from U.S. and certain other international jurisdictions. We are in discussions with certain of our regulators regarding the impact of a potential sale of Genworth Canada on their previously granted approvals. Oceanwide also needs to receive clearance from China for the currency conversion and transfer of funds.

Thank you to all of our stakeholders for your patience as we continue to work towards closing the transaction. Genworth and Oceanwide remain committed to this transaction and are doing everything possible to bring this process to a successful conclusion.

At the same time and as demonstrated by this quarter's performance, Genworth has committed to executing its strategy and operating the businesses to improve value, while continuing to improve Genworth's financial flexibility.

Now I'll turn the call over to Kelly.


Kelly Lee Groh, Genworth Financial, Inc. - Executive VP & CFO [4]


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 0, which is down 8 points from the prior quarter and up 8 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 5 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 loss ratio.

New delinquencies for the quarter were down on a sequential basis, reflecting seasonality, although up year-over-year reflecting the larger in-force portfolio. We continue to see favorable net cures and aging as cure rates remain elevated.

Overall, insurance in force in USMI continues to grow reaching its all-time high of $178 billion at the end of second quarter 2019. This was up 12% versus last year and reflects very strong levels as new insurance written as well as good persistency trends.

The U.S. mortgage origination market remained strong and was up versus the prior quarter from a seasonally higher purchase originations and a higher refinance origination market as rates remained low.

Our flow new insurance written, or NIW, for the quarter was $15.8 billion, up 65% sequentially and 39% versus the prior year. We expect our USMI second quarter 2019 estimated market share to remain strong and to have improved versus the prior quarter.

We continue to roll out our proprietary risk-based pricing engine generate, with good adoption rates by our customers and have continued to selectively purchase pay in forward commitment transactions. As we mentioned last quarter, we are managing to an overall return expectation in the mid-teens on the 2019 book year new insurance written and our pricing trends support this expectation.

Turning to Canada. The loss ratio of 15% was flat versus the prior quarter and prior year. New delinquencies net of cures decreased sequentially and versus the prior year. This was offset by higher average reserves on delinquencies as the proportion of higher severity delinquencies from Alberta increased.

Given Canada's first half loss ratio of 15% and expectations for the remainder of the year, we expect Canada's full year 2019 loss ratio to remain in the 15% to 25% range, with a bias towards the lower half of the range as noted in Canada's disclosures last evening. Flow NIW in Canada increased 77% sequentially from a seasonally larger origination market and 11% versus the prior year.

Moving to Australia. The U.S. GAAP loss ratio in the quarter was 34%, unchanged versus the prior quarter and up 6 points versus the prior year primarily from lower earned premiums from portfolio seasoning and higher levels of cancellations in the prior year.

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%, considering the seasonal pattern of lower delinquencies traditionally experienced in the second half of the year.

Our flow new business levels in Australia were up 12% versus the prior quarter from a seasonally higher origination market and up 8% versus the prior year primarily from higher market penetration from certain key customers.

Turning to our U.S. Life Insurance segment. Our second quarter results were driven by seasonality and good in force rate action results in long-term care insurance and nonrecurring net favorable items in life insurance.

In long-term care, claim terminations remained favorable and were up sequentially in the second 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. Compared to last year, claim terminations in the quarter were less favorable, although still within our range of expectations.

The quarter also benefited from improved benefit utilization on existing claims as we updated our approach to this assumption last year. New claims following updated utilization assumptions from the fourth quarter of 2018 did reflect higher severity compared to prior periods as well as higher claim counts from the larger, newer blocks, both of which we expect to continue.

We also continue to see favorable development in the second quarter on prior year incurred but not reported, or IBNR, claims during the quarter, which partially offsets the incremental new claims' expense versus the prior year.

As the IBNR claims severity is updated on a rolling quarterly basis to incorporate recent claims experience, we would not expect this benefit to continue to the same degree in the second half of 2019.

The overall financial benefits of our in-force rate actions for LTC, particularly the reduced benefit impacts, were better sequentially and versus the prior year as illustrated on Page 10 of the investor deck released this morning. This is primarily related to the large rate increase approvals in 2018 and earlier this year, which are now being implemented. These rate action approvals included expanded reduced benefit and stable premium options that are being selected at a higher frequency by our policyholders.

We do expect the reduce benefit trend to continue in the near term, although with variability as we continue to implement the in-force rate actions achieved last year and in the first half of 2019.

Based on last year's margin testing, we estimated the need for approximately $6 billion on a net present value basis in anticipated future approved rate actions under actuarial assumptions that were updated in late 2018.

Our first half approvals driven by a few large states on a net present value basis were approximately $1 billion of the $6 billion remaining as of year-end 2018. As discussed last quarter, our multiyear rate action plan assumes it will take approximately 10 years to obtain and implement these remaining approvals and considers the timing and phase-in implementation on rate actions previously approved.

We are currently monitoring our actuarial assumptions as additional experience develops and such experience may change the future amount of rate actions needed as we get additional and more credible claim data, especially on our newer blocks.

Our newer blocks have much younger attained ages versus our legacy blocks, which provides a longer runway for additional rate action and allows smaller, but earlier rate actions, to offset potential margin impacts.

While the review is still in progress, our claim reserve assumptions, which were updated in 4Q '18, appeared to be holding up in the aggregate. We are expecting to perform our annual LTC claim reserve review during the third quarter and complete loss recognition, unlocking reviews and cash flow testing for all product lines, including long-term care insurance in connection with our fourth quarter financial statement preparation.

While we're early in the review process, we are gaining more experience on our newer LTC blocks and are mindful of the low-interest rate environment. These factors may impact fourth quarter update.

Turning to life insurance. Our results include a $17 million after-tax net benefit from a reinsurance refinement and a correction related to ceded premiums on certain term conversion policies. Overall, mortality in life for the quarter was higher sequentially and versus last year due primarily to higher claims severity.

The term life business continues to be negatively impacted from higher lapses primarily associated with large 20-year level premium term life insurance blocks entering their post-level premium periods, which result in lower premiums and accelerated amortization of deferred acquisition costs, or DAC, upon lapse.

The locked-in assumptions were set the year the policies were written, as required under current accounting standards. These assumptions assumed more policies would remain in force following the level premium period. If policies lapse at a higher rate than expected, we write off any remaining DAC associated with the lapse in policies. This impact accelerated in the second quarter as a larger block of 20-year level premium term life business written in 1999 started reaching the end of its level premium period and passed the customary grace period on renewal.

Accelerated term life insurance DAC amortization primarily related to these term life lapses, reduced earnings by an additional $11 million after-tax versus last quarter. This is the first full quarter given grace periods we are seeing the brunt of the lapse impact on this large 20-year block, and we expect amortization to further increase continuing throughout 2019 and into 2020 as more of the 1999 written business as well as the 20-year business written in the year 2000 enters the post-level premium period and lapses accelerate.

In our fixed annuity products, we saw lower mortality or increased longevity versus the prior quarter and prior year, which reduced income during the quarter. We also saw sequential higher variable investment income, which partially offset the lower mortality during the quarter. We did have an after-tax loss recognition charge of $4 million during the quarter related to single premium immediate annuities mainly from lower interest rates.

Our loss in the corporate and other segment of $72 million for the quarter was slightly down versus last quarter, although it continues to be higher than our historical run rates due to GILTI taxes, or global intangible low taxed income taxes, of approximately $11 million that we discussed at length last quarter and other tax impacts that we expect will reverse by year-end.

As we assessed investing our ownership interest in Genworth Canada, we would not expected to have a significant cash tax impact. Our current tax basis is similar to our current book basis, and we anticipate being able to utilize existing tax attributes, such as net operating losses, if proceeds exceeded our current basis. We will provide updates at an appropriate time in the future.

If the definitive agreement is reached on Canada with an expectation of a near-term close, accounting guidance would require us to represent our historical financial statements with our stake in Canada included as discontinued operations, net of a few adjustments and classified as held-for-sale.

Regarding capital levels. Our mortgage insurance businesses overall continue to maintain very strong capital positions. In USMI, we finished the quarter with a PMIER sufficiency ratio of 123%, unchanged from last quarter. While our strong results increased our available assets, our strong new insurance written during the quarter also increased PMIER's required capital. That being said, our current PMIER's sufficiency level increased to over $650 million above the level of required assets.

Given the delay in the Oceanwide transaction and considering the USMI's strong capital level, we are evaluating the potential for a dividend from USMI in the second half of 2019. However, we have not made a final decision and we'll need to consider progress on the transaction in addition to numerous other factors before a decision is made.

In our Canada MI business, we have an estimated mortgage insurer capital adequacy test, or MICAT, ratio, which is the new standard adopted last quarter of 169%, down slightly from the last quarter. This level continues to remain above the company's operating target range of 160% to 165%. In addition to Canada's ordinary quarterly dividend, Canada is maintaining expectations for 2019 extraordinary capital redeployment of between CAD 400 million and CAD 550 million. At current foreign exchange rates, this range translates to approximately USD 120 million to USD 165 million to our holding company and approximately $50 million to $65 million to USMI.

While Canada did not execute on this program during the first quarter, during the second quarter, our holding company received approximately $30 million net dividends and share buyback proceeds and USMI received approximately $12 million from this initiative, over and above ordinary dividends. As we are evaluating a potential disposition of our stake in Genworth Canada, amounts received would vary depending on the timing of any transaction.

Our Australia MI business ended the quarter with an estimated capital ratio of 208%, up from 201% last quarter, which is nearly AUD 600 million above the high end of the prescribed capital amount, or PCA management target range of 132% to 144%. The increase in Australia's capital ratio reflected policy cancellations and continued portfolio seasoning, partially offset by continued execution of their share repurchase initiative of AUD 100 million, which was announced in early 2019 and is roughly 2/3 complete as of the second quarter.

Australia did mention on their call last evening that the remaining portion would be paid via a special dividend in the third quarter. Australia will continue to actively manage their capital position and to evaluate a range of additional capital management initiatives for execution.

We expect capital in Genworth Life Insurance Company, or GLIC, to end the second quarter at approximately 190% of company action level RBC, which was down 5 points from the first quarter. While our U.S. Life statutory income was positive in GLIC for the quarter due primarily to higher earnings from long-term care in force rate actions, our required capital increased in variable annuity from lower interest rates and in LTC from continued claims development, which more than offset the positive statutory income for U.S. Life in the quarter.

I also want to remind investors again that as part of our earlier agreement with Delaware regarding the Oceanwide transaction, Genworth will contribute to GLIC $175 million in 3 tranches. This contribution took GLIC is a special commitment made only in conjunction with the proposed transaction with Oceanwide.

As we've indicated previously, it is our intention to manage the U.S. Life entities on a stand-alone basis with no future plans to infuse capital in these businesses nor extract dividends.

The U.S. life businesses will rely on their consolidated statutory capital of approximately $1.9 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 slightly over $400 million in cash and liquid assets, similar to the prior quarter. During the quarter, total net dividends and proceeds from share repurchases to the holding company were $58 million. Intercompany tax payments of $18 million were also sourced to the holding company during second quarter. Offsetting these inflows were interest payments of $42 million, additional cash collateral of $18 million primarily on our hybrid debt interest rate swaps as rates moved lower during the quarter and $18 million in other miscellaneous items.

Our current cash level is approximately $100 million below our targeted 2x forward debt service buffer. We continue to discuss the timing of the post-closing $1.5 billion capital plan with Oceanwide in light of the delay in closing the transaction, and we are very mindful of our upcoming holding company debt maturities over the next few years.

The capital commitment from Oceanwide, along with existing holding company cash and dividends from our well-capitalized mortgage insurance subsidiaries, will be key to addressing these items.

While the disposition and timing of our 57% ownership at Genworth Canada is uncertain, we view the potential proceeds of the holding company's approximately 40% share as an additional source to address near-term holding company debt maturities.

As you saw last week, we did launch a bondholder consent process in order to facilitate the disposition of Genworth Canada, which requires an amount equal to at least 80% of net proceeds received by Genworth Holdings to go to reducing debt.

Now I'm going to pivot for a few moments to address some questions that investors have been asking around components of Genworth's value. While investors should come to their own conclusion, I did want to share a few perspectives on some key items that would typically be used in some of the parts valuation or similar analysis.

Related to the value of our mortgage insurance businesses, the values of daily stock trades and closing prices related to Genworth Canada and Genworth Australia are publicly available.

As of last Friday, the U.S. dollar converted values of Genworth's combined share of Canada and Australia at Friday's spot FX rate was near the middle of $1.6 billion to $1.7 billion and $400 million to $500 million range, respectively.

The value for our U.S. mortgage insurance business can be reasonably derived versus pure multiples on annual earning, which for established public market competitors have recently been towards the middle of a 7 to 9x earnings multiples range.

Regarding our U.S. life insurance business. Since we have no intention to provide nor extract capital from U.S. Life other than the special commitment agreed to in connection with Oceanwide transaction, we believe most investors would value this business at 0.

Regarding the holding company. Conventional practice by many has been to subtract from holding company cash debt and intercompany commitments, such as our $200 million GLIC intercompany note. Our holding companies also have certain holding company assets mainly deferred taxes, largely offset by liabilities, such as accrued HR liabilities and other miscellaneous items.

Lastly, if we chose to prepay our debt, the debt prepayment penalties from [make whole] vary by series from 20 to 65 basis points over the risk-free rate on our senior debt tranches and are computed based on the remaining time to maturity.

Based upon current rates, as of the end of last week, the total may call on our senior debt, which would be our maximum exposure to diffuse all of the debt today would be approximately $360 million.

If one were to use an approach that considers many of the items I just laid out, the value of Genworth would exceed some of the more pessimistic valuations that have been published, but, of course, would be subject to change based on market and economic conditions among other factors.

Now back to the quarter. In closing, it was a strong quarter for Genworth. We remain focused on the Oceanwide transaction and are taking the necessary steps to complete the transaction. Operationally, our mortgage insurance businesses continue to execute on their priorities and are performing very well financially with solid earnings and strong capital levels.

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.


Questions and Answers


Operator [1]


(Operator Instructions) We will take our first question from Jimmy Bhullar from JPMorgan.


Jamminder Singh Bhullar, JP Morgan Chase & Co, Research Division - Senior Analyst [2]


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 it's price increases, claims trends or otherwise that would offset some of the headwind related to the adjustment on rates?


Kelly Lee Groh, Genworth Financial, Inc. - Executive VP & CFO [3]


Thanks for the question, Jimmy, it's 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.


Jamminder Singh Bhullar, JP Morgan Chase & Co, Research Division - Senior Analyst [4]


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?


Thomas Joseph McInerney, Genworth Financial, Inc. - President, CEO & Director [5]


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.


Operator [6]


We will take our next question from Ryan Krueger from KBW.


Ryan Joel Krueger, Keefe, Bruyette, & Woods, Inc., Research Division - MD of Equity Research [7]


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 reapproved? Or is it more informal?


Thomas Joseph McInerney, Genworth Financial, Inc. - President, CEO & Director [8]


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 that 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.


Ryan Joel Krueger, Keefe, Bruyette, & Woods, Inc., Research Division - MD of Equity Research [9]


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


Thomas Joseph McInerney, Genworth Financial, Inc. - President, CEO & Director [10]


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.


Ryan Joel Krueger, Keefe, Bruyette, & Woods, Inc., Research Division - MD of Equity Research [11]


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?


Kelly Lee Groh, Genworth Financial, Inc. - Executive VP & CFO [12]


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 we're evaluating a dividend in the second half of the year (inaudible), and that evaluation is kind of an independent evaluation of that, just to stay on the transaction and our management of our holding company cash liquidity and debt service.


Operator [13]


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


Peter Vincent Troisi, Barclays Bank PLC, Research Division - Director & Senior Analyst [14]


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


Operator [15]


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


Thomas Joseph McInerney, Genworth Financial, Inc. - President, CEO & Director [16]


Thank you, Diane, and thanks to 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.


Operator [17]


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.