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Genworth Financial, Inc. (NYSE:GNW)
Q2 2019 Earnings Call
July 31, 2019, 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 second quarter 2019 earnings conference call. My name is Diana, 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, this conference is being recorded for replay purposes. Also, we ask that you refrain from using cellphones, speakerphones, or headsets during the Q&A portion of today's call. I would now like to turn the presentation over to Tim Owens, Vice President of Investor Relations. Mr. Owens, you may proceed.

Tim Owens -- Vice President of Investor Relations

Thank you, operator. Good morning, everyone, and thank you for joining Genworth's second quarter 2019 earnings call. Our press release and financial supplement were released last night, and this morning, our earnings presentation was posted to our website and will be referenced during our call. We encourage you to review all of these materials.

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

During the call this morning, we may make various forward-looking statements. Our actual results may differ materially from such statements. We advise you to read the cautionary notes regarding forward-looking statements in our earnings release and related presentation, as well as the risk factors of our most recent annual report on Form 10-K, as filed with the SEC. This morning's discussion also includes non-GAAP financial measures that we believe 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, we talk about results of our international business, 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.

Tom McInerney -- President and Chief Executive Officer

Good morning, and thank you for joining out call. Today, we will provide you with a review of Genworth's strong second-quarter results, as well as provide an update on 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 share in the U.S. market. USMI's capital position remains strong, with a PMIERs sufficiency ratio of 123%, an excess of $600 million in capital above the revised PMIERs 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 larger 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 our 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 actuarily justified premium increases on long-term care insurance policies. Genworth and I are now actively engaged with the 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 to result in more timely approvals of actuarily 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 industrywide initiative, while continuing to focus on achieving Genworth's long-term care rate action goals.

Let me now turn to a review of the recent events with respect to our ongoing transaction with Oceanwide. On June 30th, Genworth and Oceanwide entered into an 11th waiver and extension of the merger agreement to a date not later than November 30, 2019. This waiver and agreement also allows Genworth to solicit interest for a potential sale of Genworth Canada, our 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 interests to successfully complete the Oceanwide transaction. Although Genworth Canada is one of our top-performing businesses, the lack of feedback from Canadian regulators about their review of the Oceanwide transaction was risking our ability to close the transaction, which remains in the best interests 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, or 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 three 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 at 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 timeframe, 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 timeline of such sale will be mostly dictated by the regulatory review process once we have an agreement with a 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 of the 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 approach 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 through the Canadian regulatory review process, and now the sale process, is a testament to their commitment to the transaction and our continued belief that this transaction is in the best interests 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 toward closing the transaction. Genworth and Oceanwide remain committed to the 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 is 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 Groh -- Chief Financial Officer

Thanks, Tom, and good morning, everyone. Today, I will cover more detail on our second-quarter financial results and key drivers, capital levels in our businesses, and updates around cash and flexibility at our holding company, as the merger with Oceanwide has extended and we look at disposition options for our ownership stake in our Canadian mortgage insurer, Genworth Canada.

Let's begin with this quarter's financial performance. We reported net income for the quarter of $168 million and an adjusted operating income of $204 million. Our mortgage insurance businesses continue to perform well, with very strong loss ratio performance in the U.S. and Canada and solid capital levels in all the mortgage insurance businesses. Our U.S. life results were driven by seasonality, and good in-force rate action results in long-term care insurance, and some net favorable items in life insurance that we don't expect to recur.

Underlying our collective mortgage insurance results is an overall solid macroeconomic environment, including steady economic growth, low unemployment, and interest rate levels and stable housing trends in most markets and at home price levels where we generally provide mortgage insurance coverage. USMI's adjusted operating income was $147 million in the quarter, which was up $23 million sequentially and $10 million versus the prior year. The second-quarter reported loss ratio was zero, which is down 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 in 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 of new insurance written, as well as good persistency trends.

The U.S. mortgage origination market remains 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 participate in forward commitment transactions. As we mentioned last quarter, we are 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 15-25% range with a bias toward 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 45-55% 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 claim 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 reduced 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 in phasing 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 actions 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, appear 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 clients, 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 updates.

Turning to life insurance, our results include a $17 million after-tax net benefit from a reinsurance refinement and a correction related to seated premiums on certain term conversion policies. Overall mortality in life for the quarter was higher sequentially and versus last year, due primarily to higher claim 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 at 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. As policies lapse at a higher rate than expected, we write off any remaining DAC associated with the lapsing policies. This impact accelerated in the second quarter, as the 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-tax 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 assess divesting our ownership interest in Genworth Canada, we would not expect it 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 a 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 PMIERs 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 PMIERs-required capital. That being said, our current PMIERs sufficiency level increased to over $650 million above the level of required assets. Given the delay in the Oceanwide transaction and considering 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 will 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 160-165%. In addition to Canada's ordinary quarterly dividends, Canada is maintaining expectations for 2019 extraordinary capital redeployment of between CA$400-550 million. At current foreign exchange rates, this range translates to approximately $120-165 million to our holding company and approximately $50-65 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 AU$600 million, above the high end of the prescribed capital amount or PCA management target range of 132-134%. 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 AU$100 million, which was announced in early 2019 and is roughly two thirds 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 five 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 enforced rate actions, our required capital increased in variable annuity from lower interest rates in an 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 three tranches. This contribution to 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 a source 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 of 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 conclusions, I did want to share a few perspectives on some key items that would typically be used in a sum-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 a $1.6-1.7 billion and $400-500 million range respectively. The value for our U.S. mortgage insurance business can be reasonably derived versus peer multiples on annual earnings, which, for established public market competitors, have recently been toward the middle of a 7-9x earnings multiple 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 the Oceanwide transaction, we believe most investors would value this business at zero. 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 for make-hold vary by series from 20-65 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 make-whole 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

Ladies and gentlemen, we will now begin the question and answer portion of the call. As a reminder, please refrain from using cellphones, speakerphones, or headsets. Press *1 to ask a question. If at any time your question has already been answered or you would like to withdraw your question, please press *2 to be removed from the queue. Please press *1 now. We will take our first question from Jimmy Bhullar from J.P. Morgan. Please go ahead.

Jimmy Bhullar -- J.P. Morgan Chase -- Analyst

Hi, good morning. First, I just had a question on long-term care as you're 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, but are there things that you see in the business, whether it's price increases, claims trends, or otherwise, that would offset some of the headwinds related to the adjustment on rates?

Kelly Groh -- Chief Financial Officer

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 last recognition testing margins, we use our average portfolio rate as our discount rate, and so, last year, that was about 5.3% on our age gap business, and it's really not all that different as of the second quarter right now, so it's a large portfolio that moves rather slowly with reinvestment, 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 incidence, 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.

Jimmy Bhullar -- J.P. Morgan Chase -- Analyst

And then, just on the 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. approvals, once you get closer to closing -- assuming that everything's going through well -- then the U.S. regulators actually ask you to resubmit for approval? Just trying to get to whether there's a soft or 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?

Tom McInerney -- President and Chief Executive Officer

Jimmy, 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 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're 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.

Jimmy Bhullar -- J.P. Morgan Chase -- Analyst

Okay, thanks. Good luck.

Operator

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

Ryan Krueger -- Keefe, Bruyette & Woods -- Managing Director

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

Tom McInerney -- President and Chief Executive Officer

That depends. 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 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 -- our team, and the 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' evaluation of the Canada sale and how it impacts their overall approval.

Ryan Krueger -- Keefe, Bruyette & Woods -- Managing Director

And, would CFIUS have to rereview it all, or is this more the U.S. insurance regulators?

Tom McInerney -- President and Chief Executive Officer

So, 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 been 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. 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 have any impact on the mitigation agreement, which is the real national security focus.

Ryan Krueger -- Keefe, Bruyette & Woods -- Managing Director

Thanks. And, just last one -- in terms of a 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 Groh -- Chief Financial Officer

That's a great question, Ryan. This is Kelly. In terms of the way the PMIERs ratio works, for affiliate stock, we get about a 25% haircut on that, so as we think about the impact on the PMIERs 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 from USMI, and that evaluation was an independent evaluation of that, just [audio cuts out] in the transaction and our management of our holding company cash liquidity and debt service.

Ryan Krueger -- Keefe, Bruyette & Woods -- Managing Director

Okay, thank you.

Operator

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

Peter Troisi -- Barclays Investment Bank -- Analyst

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

Operator

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

Tom McInerney -- President and Chief Executive Officer

Thank you, Diana, and thanks to 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 sales process.

Operator

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.

Duration: 45 minutes

Call participants:

Tim Owens -- Vice President, Investor Relations

Tom McInerney -- President and Chief Executive Officer

Kelly Groh -- Chief Financial Officer

Kevin Schneider -- Chief Operating Officer

Dan Sheehan -- Chief Investment Officer

Jimmy Bhullar -- J.P. Morgan Chase -- Analyst

Ryan Krueger -- Keefe, Bruyette & Woods -- Managing Director

Peter Troisi -- Barclays Investment Bank -- Analyst

More GNW analysis

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