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Genworth Financial Inc  (NYSE:GNW)
Q3 2018 Earnings Conference Call
Oct. 31, 2018, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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

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

Tim Owens -- Vice president of Investor Relations

Thank you, operator. Good morning, everyone, and thank you for joining Genworth's third quarter 2018 earnings call. Our press release and financial supplement were released last night and this morning, our earnings presentation was posted to our website and will be referenced during our call. We encourage you to review all of these materials. Today, you will hear from our President and Chief Executive Officer, Tom McInerney followed by Kelly Groh, our Chief Financial Officer. Following our prepared comments, we will open up the call for a question-and-answer period. In addition to our speakers; Kevin Schneider, Chief Operating Officer and Dan Sheehan, Chief Investment Officer will be available to take your questions.

During the call this morning, we may make various forward-looking statements. Our actual results may differ materially from such statements. We advise you to read the cautionary notes regarding forward-looking statements in our earnings release and related presentation as well as the risk factors of our most recent Annual Report on Form 10-K as filed with the SEC. This morning's discussion also includes non-GAAP financial measures that we believe may be meaningful to investors. In our financial supplement, earnings release, and investor materials; non-GAAP measures have been reconciled to GAAP where required in accordance with SEC rules. Also when we talk about the results of our international businesses, please note that all percentage changes exclude the impact of foreign exchange.

And finally, references to statutory results are estimates due to the timing of the filing of the statutory statements. Before I turn the call over to Tom and Kelly; as we have previously announced, we plan to hold our 2018 Annual Stockholders Meeting on December 13th to comply with the New York Stock Exchange rules. Our 2018 proxy statement will be filed in the near future. In the event the proposed merger with Oceanwide is completed by December 13, 2018, the 2018 Annual Stockholders Meeting will not be held.

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

Thomas J. McInerney -- President and Chief Executive Officer

Good morning and thank you for joining today's earnings call. Genworth had a very good third quarter delivering strong earnings, execution against our strategic priorities, and significant progress toward closing the proposed transaction with Oceanwide. In the third quarter, Genworth generated $145 million in adjusted operating income or $0.29 per diluted share compared with adjusted operating income of $76 million or $0.15 per diluted share in the prior year period. Our global mortgage insurance business continues to drive earnings with strong growth in our US and Canada MI businesses. Our U.S. Life Insurance results were mixed with strong performance in our fixed annuity business offset by less favorable performance in our long-term care and life insurance businesses.

Starting with U.S. MI. Third quarter adjusted operating income increased 62% year-over-year to $118 million driven by solid insurance in-force growth, favorable loss performance, and benefits from a lower tax rate. U.S. MI's capital position remained strong ending the quarter with over $750 million in capital above PMIERs requirement. As many of you know, PMIERs 2.0 was finalized in September and will come effective as of March 31, 2019 and we will also have significant excess against this new standard. In Canada, adjusted operating income increased 22% year-over-year to $44 million with stable loss performance. Canada's capital ratio strengthened compared to the second quarter and the prior year period and remains well above minimum requirements. And in Australia, adjusted operating income increased 50% year-over-year to $17 million.

Our U.S. Life Insurance segment delivered an operating loss of $3 million, primarily driven by unfavorable LTC claim terminations, higher LTC benefit utilization trends, and new LTC claims. Our LTC premium rate action plan remains a high strategic priority for Genworth. As shown on Slide 10, we received 39 state filing approvals in the third quarter impacting $294 million of in-force premiums with an average premium increase of 56% bringing our year-to-date total of impacted in-force premiums to $526 million. This plan is performing in line with our expectations and we are on track to meet our full-year goals. Let me now turn to a review of the progress made toward completing the Oceanwide transaction. Since Genworth and Oceanwide received clearance from CFIUS in June, we have made significant strides toward satisfying the remaining closing conditions.

In the third quarter, we submitted important supplemental information to our regulators to facilitate their review, including updated details around the capital investment plan. Under the capital investment plan, Oceanwide will contribute an aggregate of $1.5 billion to Genworth in several tranches following the closing of the transaction with the final tranche contributed by March, 31, 2020 subject to receipt of the required regulatory approvals. I am very pleased to report that we reached a critical milestone with the Delaware Department Of Insurance last week. Delaware, one of our primary state regulators, set a date for the public hearing on the proposed transaction. This has been a highly anticipated moment for both Genworth and Oceanwide. The public hearing, which is a formal step in Delaware's approval process, will be held on November 28th.

The Delaware commissioner has up to 30 days following the hearing to issue a ruling on our transaction. Delaware is the only regulator of Genworth that will hold a public hearing for this transaction. Given the timing of the hearing date and duration of the review period, we are targeting closing the deal by year-end. Genworth and Oceanwide also announced last week that Genworth will contribute $175 million in capital to GLIC in phases post closing with the final amount contributed by the end of January 2020. As you may recall, the $175 million had been previously committed by Genworth to facilitate the unstacking of GLAIC from GLIC. It is important to note that Genworth could not make this contribution to GLIC without Oceanwide's $1.5 billion capital investment plan.

We believe the Oceanwide capital plan and the $175 million contribution to GLIC clearly demonstrates that the Oceanwide acquisition is in the best interest for policyholders, customers, and other stakeholders. As Kelly will discuss in further detail, Genworth's position on future capital support for GLIC has not changed. The U.S. life businesses will continue to be managed on a stand-alone basis with a continued need for actuarially justified LTC premium increases and benefit reductions. Oceanwide and Genworth have no plans to infuse additional capital to the legacy LTC business beyond the $175 million. With these significant milestones behind us, we are now fully focused on satisfying the remaining closing conditions and closing the transaction by the end of the year.

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

I will turn the call over to Kelly, who will review our quarterly results and capital position in more detail.

Kelly L. Groh -- Executive Vice President and Chief Financial Officer

Thanks, Tom, and good morning, everyone. Today I will cover our third quarter financial results and the key drivers, capital levels in our businesses, and updates around cash and flexibility at our holding company. Let's begin with this quarter's financial performance. We reported net income for the quarter of $146 million and adjusted operating income of $145 million. Our overall results continue to reflect a very strong loss performance in our US and Canadian mortgage insurance businesses. Our U.S. Life Insurance business results were mixed with continued strong fixed annuity performance and losses in long-term care and life insurance. Our strong results in our mortgage insurance businesses continue to reflect positive macroeconomic environment including steady economic growth, low unemployment levels, and favorable housing trends in most regions.

In our U.S. Mortgage Insurance business, our third quarter reported loss ratio was 11%, which is up 19 points from the prior quarter and down 9 points from the prior year. Last quarter's loss ratio reflected a favorable pre-tax $28 million reserve adjustment, which benefited earnings by $22 million and reduced the loss ratio by 15 points to a negative 8%. The sequential increase in the loss ratio absent that adjustment was driven by less favorable net cures in aging partially offset with a lower reserve factor applied to new delinquencies in the quarter. We continue to track the incremental losses from last year's hurricanes and these delinquencies are performing consistent with what we have reserved. Our exposure to the most recent hurricanes, Florence and Michael, is lower and we do not anticipate any material impacts from these events.

Overall, insurance in-force in US MI continues to grow reaching an all-time high of $163 billion at 3Q '18. This was up 10% versus last year and reflects favorable persistency trends as well as strong levels of new insurance written. The lower US tax rate continued to provide earnings lift by approximately $21 million in the quarter versus last year's rate. The overall US origination market was stable versus the prior quarter. Purchase origination growth has slowed due to lower housing affordability and refinancings given higher mortgage rates. Our new insurance written or NIW was $10.3 billion, down 10% sequentially. We continue to monitor our market share given the highly competitive pricing environment, our lower ratings than our competitors, the transaction uncertainty with Oceanwide, and increased customer concentration.

While our strong capital levels and differentiated service and product offerings have served to mitigate some of this pressure, we believe our market share declined this quarter primarily from the loss of one customer. Turning to Canada, the business' loss ratio decreased 1 point from the prior quarter to 14% primarily reflecting a modest decrease in new delinquencies net of cures mainly in both Ontario and the Atlantic region. The loss ratio was flat versus the prior year as lower new delinquencies were offset by less favorable loss reserve development. Canada updated their loss ratio guidance last quarter to a range of 10% to 20% and our year-to-date loss ratio of 14% falls within that range. The territorial changes made with US tax reform last year continued to benefit Genworth's share of Canada's earnings by approximately $7 million versus the prior year as the segment's effective tax rate of approximately 27% now more closely reflects the Canadian corporate tax rate.

Flow NIW in Canada increased 16% sequentially primarily from a seasonally larger origination market although was down 2% versus the prior year due to a modestly smaller origination market driven by some of the more recent regulatory changes. Moving to Australia, the loss ratio in the quarter was 31%, up 3 points versus the prior quarter due primarily to the decline in earned premiums resulting from last quarter's policy cancellation effort, which was partially offset by favorable net aging. The loss ratio was down 6 points versus the prior year, mostly the result of higher earned premiums from the change in earnings curve that occurred in the fourth quarter of 2017. On Australia's IFRS accounting basis, the year-to-date loss ratio is 53%. As a result, the business has changed its total year 2018 loss ratio expectation to 50% to 55% from its previous range of 40% to 50%.

As a reminder, our Australia business completed a review of its premium earnings pattern in the fourth quarter of 2017 resulting in a cumulative adjustment of the unearned premium reserve that was applied retrospectively for US GAAP accounting. The US GAAP treatment of the Australia earnings curve adjustment is different than IFRS in Australia, which adjusted the earnings curve prospectively versus retrospectively. This results in differences in earned premiums, loss ratio metrics, and earnings when the business reports locally. Australia is expected to complete a similar evaluation in the fourth quarter of 2018. Our flow new business levels in Australia were up 5% versus the prior quarter and 8% versus the prior year, both primarily the result of increased activity from certain key customers.

Now to discuss our U.S. Life Insurance segment. Our third quarter results were primarily driven by adverse existing claim performance in long-term care and unfavorable mortality in life insurance contrasted with stable performance in our fixed annuity business. In LTC we did see lower terminations in the third quarter, which is generally consistent with seasonal patterns as we tend to see higher terminations in the first half of the year and lower terminations in the second half of the year. We continue to see utilization pressure during the quarter as policyholders are utilizing more of their daily benefit amounts than the initial reserves assumed. We are monitoring the elevated benefit utilization levels as claims continue to develop. Earnings on our acquired block were down sequentially as the prior quarter's results reflected a favorable true-up for the seasonably high claim termination results from the first quarter.

Our annual review of the claims reserves will be completed in the fourth quarter along with our loss recognition testing and cash flow testing for the active life reserves. The claim utilization trends are an area of focus for the reserve review and may impact claim reserves although the work on this assumption as well as other assumptions, including any methodology changes, is not yet complete. The finalization of the claims review is taking a little longer than in recent years as this year we are contemplating methodology changes around how to define original situs and estimate future utilization of benefits. Given the complexity of these potential changes, significant review is required. Additionally, we have engaged a third-party consulting firm to evaluate any potential changes. We have seen very good results on our multiyear in-force rate action plan and most regulators have been approving actuarially justified rate action requests.

These approval amounts have been in line with assumptions used in our last year's margin testing and this will continue to be a focus of ours to help mitigate margin pressure. Turning to life insurance, overall mortality continues to be worse than expectations. Results versus the prior quarter reflected higher mortality in term life along with lower premiums. We did see modest improvement in universal life mortality versus last quarter although this is still running above expectations. Compared to the prior year, life results were impacted by lower in-force earnings from increased reinsurance and the gradual run-off of the block. Results in the prior year included an unfavorable impact of $15 million after-tax from model refinements. Although mortality levels will deviate each period, we have seen trends over the last several years and throughout 2018 of higher mortality in our universal and term universal life insurance products than our current assumptions in loss recognition testing.

The analysis of this is not yet complete and we expect to evaluate updating this and other assumptions as part of our annual assumption review to be completed in the fourth quarter. In our fixed annuity products, we saw less favorable variable investment income and unfavorable mortality versus the prior quarter. Results versus the prior year were better reflecting improved mortality, a lower tax rate, and the non-recurrence of a $6 million after-tax loss recognition charge in third quarter 2017 related to single premium immediate annuities mainly from lower interest rates in that period. Our loss in the Corporate and Other segment was lower than the prior period mainly due to a $10 million benefit related to tax reform adjustments and last quarter's $19 million expense related to a revaluation of deferred tax assets and liabilities on foreign subsidiaries.

We continue to evaluate certain provisions within the Tax Cuts and Jobs Act enacted last year such as the Global Intangible Low-taxed Income or GILTI provision. These provisions may have an impact on US and foreign deferred taxes as well as the effective tax rate reported by our foreign subsidiaries. Now I'll move to capital levels where our mortgage insurance businesses continue to maintain very strong capital positions. In U.S. MI, we finished the third quarter with a PMIERs sufficiency ratio of 130% or in excess of $750 million above the required assets, up from 129% at the end of the second quarter and 122% at the end of the third quarter of 2017. This improvement was primarily driven by solid business performance and positive cash flows. As we disclosed last month, the revised private mortgage insurer eligibility requirements or PMIERs 2.0 have been finalized by the Federal Housing Finance Agency (FHFA) with a first quarter 2019 implementation date.

If PMIERs 2.0 had been effective as of September 30, 2018, we estimate that our sufficiency ratio would have been approximately 120% or more than $550 million of available assets above the PMIERs 2.0 requirements. In our Canada MI business, we saw an estimated capital ratio of 171% in the quarter, which continues to remain above the company's operating MCT or minimum capital target range of 160% to 165%. During the quarter, Canada completed CAD50 million of share repurchases. The Canadian Office of the Superintendent of Financial Institutions or OSFI did finalize updates to the capital framework during the quarter, which will become active January 1, 2019. These new requirements include an increase of 5% in the base total asset requirements on existing insurance in-force and eliminate a one-time update to credit scores for 2015 in prior books.

Collectively, these new requirements should permit the business to operate a more efficient capital basis for 2019. And as the Canada business disclosed last evening, this may permit more meaningful levels of capital redeployment in addition to regular quarterly dividends in 2019. Our Australia MI business ended the quarter with an estimated capital ratio of 185%, which is above the high end of our prescribed capital amount or PCA management target range of 132% to 144%. Australia did complete the remainder of their previously announced AUD100 million share repurchase program during the quarter. The Genworth holding company received a total of $78 million in net dividends and proceeds from repurchases from our international mortgage insurance subsidiaries during the quarter.

Capital in Genworth Life Insurance Company or GLIC as measured by RBC declined slightly versus the prior quarter due primarily to long-term care insurance performance and is estimated at approximately 270% on a company action level basis. We are still anticipating incorporating new NAIC RBC factors related to tax reform at year-end 2018. This change in RBC factors is expected to result in a roughly 10 point decline in GLIC's consolidated RBC level. Additionally, we expect to record an increase in our AG 38 AD (ph) reserves of at least $95 million, which at that amount would reduce RBC by an additional 10 points. Note that if there are assumption updates in the US life business, RBC levels could be further impacted. As we disclosed last week as part of the Delaware regulatory update, following closing of the transaction with Oceanwide, Genworth will contribute to GLIC $175 million over the next year-and-a-half with the final amount contributed by January 31st, 2020.

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

This action, which removed GLAIC from certain events of default, was not only ratings positive; but also a prudent step to take as we move forward. Moving to the holding company, we ended the quarter with over $600 million in cash and liquid assets as compared to last quarter's approximately $620 million. During the quarter, total net dividends and proceeds from share repurchases to the holding company were $78 million. Offsetting this were interest payments of $71 million and a net outflow of $20 million reflecting tax payments and other miscellaneous items. Our ending cash level is approximately $100 million in excess of our 2 times forward debt service target and our next holding company senior debt maturity is not until June of 2020. We continue to discuss the $1.5 billion capital plan with Oceanwide and optimizing the timing of the contributions, which will come in over time after closing with the final amounts contributed by March 31st, 2020.

This evaluation considers projected mortgage Insurance dividends during this time and other holding company outlays, including the $175 million contribution to GLIC and the intercompany note due in March of 2020. To sum things up for the quarter, I'm very pleased with our global mortgage insurance performance and the successful bond consent process, which eliminated a technical default risk. While our US life business continues to be challenged, we remain focused on the operational progress, including our LTC rate action plan and other strategic actions intended to improve this business.

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

Questions and Answers:

Operator

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

Ryan Krueger -- Keefe, Bruyette & Woods -- Analyst

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

Thomas J. McInerney -- President and Chief Executive Officer

So Ryan, I talked about the NDRC process and so they have oversight and approval for macroeconomic planning policy issues in China so they have accepted the filing. So, I think that allows us to go forward. The other entities includes SAFE, which is the State Administrator for Foreign Exchange. So, they obviously have to sign off on the funding for the deal and we have a contingent structure in place for that. So, I think both Oceanwide and Genworth feel comfortable with where we are, but obviously ultimately SAFE will have to opine. In the CBIRC, which is the China Banking and Insurance Regulatory Commission, they don't -- they will be providing an advisory opinion on the deal and so that's another process we go through. I have in the last so many months have had several meetings with the CBIRC and again I think I mentioned before that, they are supportive because of the opportunity that Oceanwide and Genworth have in terms of bringing the expertise in long-term care insurance to China, which is a significant priority.

Ryan Krueger -- Keefe, Bruyette & Woods -- Analyst

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

Thomas J. McInerney -- President and Chief Executive Officer

So we -- good question, Ryan. We received approval before from Virginia and North Carolina, but they were approving the deal when we were still pursuing the unstacking. So now that we've changed the deal and done the supplemental filings, they have to reapprove for the new structure; but again, I think that they seem to be comfortable. In New York those discussions are also going well. I think we've mentioned in the past that New York is -- among the 50 states is deemed to be the expert in cyber security issues so one of the areas of focus of New York for both New York, but also the other state regulators, is on the cyber security protection. So obviously since the June approval by CFIUS, we have reviewed with New York and with the other regulators, but particularly with New York, the CFIUS mitigation plan and my view is they seem to be quite comfortable with that.

I think New York has their own cyber security regulations and the CFIUS plan in part was designed so that it would also meet all the parameters for New York. So, we feel comfortable with that. And then the GSEs have to approve the deal. Their focus is on obviously U.S. MI and again we think this transaction is a positive for U.S. MI particularly because of the $1.5 billion capital investment plan. And then in addition to the GSEs overseeing U.S. MI, the Canada and Australia regulators have to approve the deal on behalf of GMA. So, those are the overall regulatory process. Obviously it took quite a while 18 months or so on the CFIUS process and we were focused on that and I think the other regulators wanted to see how that process went. So since June, we've really geared up with the other regulators. And I would -- from a Genworth perspective, we think those processes are going well.

Ryan Krueger -- Keefe, Bruyette & Woods -- Analyst

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

Thomas J. McInerney -- President and Chief Executive Officer

So, again good question. So on the first one, so from Delaware's perspective and they oversee GLIC, there the decision for them is does the deal -- is it in the -- for the benefit of the policyholders versus the status quo. And I would say first whatever happens on the DLR and ALR, and Kelly may want to give a little bit of a background on the process there, that will occur no matter whether we do the deal or not. So I think the Delaware review will be primarily based on the points that Genworth will be making. We think it's clearly -- the deal is clearly in the best interest of policyholders because of the $1.5 billion capital plan. We're now able with that capital plan to invest the $175 million into GLIC, which we would not have been able to do without it.

It also allows us I think to manage the company going forward as a private company without the quarterly pressures that you have as a public company. And I think our position is that it makes the multi-year rate action plan, our ability to be flexible on that. So I think for all those reasons, we feel good about representing to Delaware at the hearing that this is clearly in the best interest of policyholders. And again coming back to I think whatever happens on the reserves, we obviously have ongoing meetings. Kelly Groh and Lori Evangel, our Chief Risk Officer, meet with the regulators quarterly on results as we are announcing them. And so again, I think they're generally comfortable with where we are.

Ryan Krueger -- Keefe, Bruyette & Woods -- Analyst

Okay. Thank you.

Operator

Our next question is from Jimmy Bhullar with JPMorgan.

Jimmy Bhullar -- JPMorgan -- Analyst

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

Thomas J. McInerney -- President and Chief Executive Officer

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

Jimmy Bhullar -- JPMorgan -- Analyst

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

Kevin D. Schneider -- Executive Vice President and Chief Operating Officer

Jim, this is Kevin. I -- you're correct, we do not have any additional plans for more dividends in calendar '18. Following the second quarter dividend, we still had $270 million of unassigned surplus in our flagship mortgage insurance writer Gemaco and more than $1.3 billion in excess to the 25 to 1 statutory requirement. So I guess what I'd tell you is at this point, we will -- we'll look at our capital situation as we head into the new year and we'll reevaluate that situation subject to whatever the prevailing market conditions are at that point and we'll update you going into 2019 if it's still necessary. But I think at this point, we're not ready to make that call.

Jimmy Bhullar -- JPMorgan -- Analyst

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

Kevin D. Schneider -- Executive Vice President and Chief Operating Officer

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

Jimmy Bhullar -- JPMorgan -- Analyst

Okay. Thank you.

Operator

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

Thomas Gallagher -- Evercore ISI -- Analyst

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

Kelly L. Groh -- Executive Vice President and Chief Financial Officer

Good morning, Tom. I'll be happy to take that question. When I think about DLR just to level set everyone, our DLR or our claims reserve is about $7 billion on a statutory basis and about $6.7 billion on a GAAP basis. As I've mentioned over -- every quarter we have to assert that our current reserves are our best estimate on claims reserves. So, it's something that we look at every quarter. We do update a few of the assumptions every quarter. We do a rolling utilization update. We update for interest rates on a quarterly basis. We are evaluating methodology changes though because in the last couple quarters, one of the things I've talked about is the negative utilization experience versus the reserves we put up for each of those claims.

What we're really looking at is if a more complicated model will better track that experience development so rather than use kind of our lagging simplified model where we just roll with expect -- or with actual experience, it would be more of a generalized linear model that takes a lot of different variables in. Given the complexity of that though, we're really trying to assess if this is really appropriate given industry practice, given third-party actuarial view on does this better track what we would expect to see from an emerging trend perspective. And that's really the reason we've delayed from the third to the fourth quarter is the fact that we're not sure whether or not a methodology change is appropriate at this time and we need that third-party view to be able to give us feedback and tell us if they think that this would fit our claims experience better.

Thomas Gallagher -- Evercore ISI -- Analyst

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

Kelly L. Groh -- Executive Vice President and Chief Financial Officer

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

Thomas Gallagher -- Evercore ISI -- Analyst

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

Thomas J. McInerney -- President and Chief Executive Officer

Tom, those are great questions. The first thing I would say in terms of the isolation. We did, as you know, receive the bond consent approval on GLAIC so now anything that becomes a challenge for GLIC, GLAIC, or GLICNY would be outside of the bond covenant. So, we're very pleased with that. I have -- in January I'll have been here six years and I would say for my entire tenure, I have been meeting with all the regulators in all the states and have made it very clear that while there is still roughly $2.5 billion of capital into the life companies, the current shareholders or new shareholders would not be able or willing to contribute additional capital on the legacy blocks and that those legacy blocks, the goal was to work together with the regulators to get to breakeven at some point in the future and we're on track for that. And I do think that the regulators have been quite helpful.

And in terms of the deal, we have said that you can't (ph) expect again the current shareholders or new shareholders to continue to invest in the legacy block. As part of the discussions in the last month or so with Delaware and the other principal regulators, we did agree to invest $175 million into GLIC and I think that obviously is the big plus and that comes because of the deal and the fact that Oceanwide is contributing $1.5 billion overall, which as Kelly and I have said a few times now, our intention would be to use that primarily to pay off the '20 and '21 debt, but for other growth opportunities to the extent we have that. So, I believe that the US state regulators understand that the principal way we're going to get the company -- the GLIC and GLICNY to breakeven going forward is through premium increases and I think they're comfortable with that. And again I think the value-add for the deal from the regulators and the policyholders' perspective is we are able to invest $175 million that we wouldn't have been able to do without the capital contribution from Oceanwide.

Thomas Gallagher -- Evercore ISI -- Analyst

Okay. Thanks.

Operator

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

Thomas J. McInerney -- President and Chief Executive Officer

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

Operator

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.

Duration: 46 minutes

Call participants:

Tim Owens -- Vice president of Investor Relations

Thomas J. McInerney -- President and Chief Executive Officer

Kelly L. Groh -- Executive Vice President and Chief Financial Officer

Ryan Krueger -- Keefe, Bruyette & Woods -- Analyst

Jimmy Bhullar -- JPMorgan -- Analyst

Kevin D. Schneider -- Executive Vice President and Chief Operating Officer

Thomas Gallagher -- Evercore ISI -- Analyst

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