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Executives

Georgette Nicholas - Senior Vice President, Investor Relations

Thomas Joseph McInerney - Chief Executive Officer, President and Director

Martin P. Klein - Chief Financial Officer and Executive Vice President

Amy R. Corbin - Chief Financial Officer of Insurance & Wealth Management Division and Senior Vice President of Insurance & Wealth Management Division

Analysts

Suneet L. Kamath - UBS Investment Bank, Research Division

Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division

Ryan Krueger - Dowling & Partners Securities, LLC

Sean Dargan - Macquarie Research

Thomas G. Gallagher - Crédit Suisse AG, Research Division

Edward Shields - Sandler O'Neill + Partners, L.P., Research Division

Joanne A. Smith - Scotiabank Global Banking and Markets, Research Division

Steven D. Schwartz - Raymond James & Associates, Inc., Research Division

Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division

Craig Perry

Genworth Financial, Inc. (GNW) Long-Term Care Insurance Conference December 4, 2013 9:00 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to Genworth Financial's Long-Term Care Insurance Investor Call. My name is Shannen, and I will be your coordinator today. [Operator Instructions] As a reminder, the conference is being recorded for replay purposes. [Operator Instructions]

I will now like to turn the presentation over to Georgette Nicholas, Senior Vice President of Investor Relations. Ms. Nicholas, you may proceed.

Georgette Nicholas

Thank you, operator, and good morning. We appreciate you joining us for Genworth's Long-Term Care Insurance Call. The presentation materials to be used during the call today were posted to our website this morning. Today, our speakers will be Tom McInerney, Genworth's President and Chief Executive Officer and acting President, CEO of our U.S. Life Insurance Division; along with Marty Klein, our Executive Vice President and Chief Financial Officer. Following our prepared comments, we will open the call up for a question-and-answer period. In the question-and-answer period of the call, we ask that you focus your question on our long-term care insurance balance sheet and strategy given the purpose of today's call. In addition to Tom and Marty, Amy Corbin, Chief Financial Officer of our U.S. Life Insurance Division, will be available to take your questions.

With regard to forward-looking statements and the use of non-GAAP financial information, 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 note regarding forward-looking statements in our earnings release and the risk factors of our most recent annual report on Form 10-K and our Form 10-Qs 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 investor materials, non-GAAP measures have been reconciled to GAAP, where required, in accordance with SEC rules. Today's presentation also contains assumptions related to our long-term care insurance business that are based on actuarial judgment and in accordance with industry practice and applicable accounting and regulatory requirements. Many factors can affect these assumptions and our results depend significantly upon the extent to which our actual experience is consistent with the assumptions we used.

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

Thomas Joseph McInerney

Thanks, Georgette, and good morning, everyone. Thank you for joining us today for this much-anticipated call on the long-term care insurance business. Today, I will give some perspectives on the review we completed along with the key takeaways. I will also discuss our approach to our new product that we began filing in late November for approval to sell in 38 states with more filings expected by year-end Then Marty will give an overview of the long-term care balance sheet and our views on our assumptions and margins and provide further details on U.S. GAAP loss recognition testing and statutory cash flow testing. We will also discuss some key sensitivities to the 4 main assumptions of interest rates, morbidity, mortality and lapses. We have said repeatedly that we believe we have adequate long-term care reserves with a margin for future deterioration, and our presentation today provides support for these conclusions. As I have told many of you before, when I joined Genworth in January, I was focused on understanding the long-term care business because of our results and the generally poor LTC results for the industry. Indeed, I came to Genworth with a view that the long-term care insurance business was a challenged business and we needed to determine if we should exit the business. However, now that we have completed the very intensive, broad and deep review of our long-term care insurance business and developed our 3-part LTC strategy. We have determined that long-term care insurance is a business that we believe can be managed successfully.

A key to managing the business is staying on top of the performance of the product and working with regulators to achieve rate increases as warranted. In that sense, we think long-term care insurance is more analogous to health insurance than life insurance since we have the ability to re-rate the product based on differences between our assumptions and pricing and actual experience.

Our long-term care review considered all important aspects of the business and the 4 key risks that need to be managed. We looked at how we manage our imports portfolio and our capabilities and modeling systems and risk management. We have taken steps to improve all of these areas, including the ongoing implementation of our multi-stage actuarial system conversion. We reviewed and evaluate our processes and approach to implementing rate action about the older blocks in a more proactive manner than newer blocks. A key focus has been on assessing our reserving process and the assumptions used to establish both the active and disabled life reserves. We run sensitivities to understand how they impact results and dependencies among the risk factors. We have refined and improved our reserving, underwriting and risk management processes based on analyzing and using our significant data on consumers underwriting and claims. This information has allowed us to make underwriting changes and product changes to improve the risk profile and returns of our new products going forward.

We have approximately 1.1 million lives in-force and have processed over a 190,000 claims to date, which gives us our own credible data. How we design new products is a key focus for us as we move forward with our opportunity in a long-term care insurance business. We have recently filed our privileged choice or PC Flex 3.0 product with a much improved risk profile that has only marginal interest rate and lapse risk and with significantly less morbidity risk.

Starting with Slide 2 in our long-term care review presentation, I would like to make 5 points about the in-force margins in our LTC business today. One, we evaluate our margins using 3 approaches. Using projections of our best estimate cash flows and discounting them using projected portfolio rates, the statutory balance sheet margin is approximately $4.6 billion and the GAAP balance sheet margin is approximately $4 billion. Think of this as the economic margin and note that both figures are after tax. The primary difference between the 2 is the amount of assets backing beginning statutory and GAAP liabilities, which Marty will cover later. Two, Genworth's margins were made solid under various sensitivity assumptions that include lower investment rates, lower lapse rates, less morbidity improvement and lower projected addition premium resulting from the 2012 rate actions. Three, we start with the economic balance sheet margins and then make various required changes to arrive at the actual statutory and GAAP margins. As of September 30, 2013, Genworth's statutory cash flow testing margin, using the methodology that is filed confidentially with the regulators annually, that margin is approximately $2.6 billion after tax and after various provisions for adverse deviations.

Similarly, we complete GAAP loss recognition testing using established GAAP requirements annually. And in aggregate, the GAAP margin is approximately $3 billion pre-tax as of September 30, 2013. GAAP requires that loss recognition testing be done on a pre-tax basis. Four, as we discussed during the third quarter earnings call, long-term care goodwill is fully recoverable with an excess margin of approximately $400 million over 100% more than recorded goodwill of $354 million. And finally, there are 2 specific items to note that could have some impact on our future results. First, on several purchase blocks of LTC business that we acquired many years ago, which represent about 16% of the net GAAP liabilities or $2.5 billion, there is a positive but thin loss recognition testing margin of approximately $100 million. Second, New York has specific statutory cash flow testing reserve requirements that are more conservative than most states. Because of these New York specific statutory requirements, we have been holding $120 million additional reserve in our New York subsidiary over what we would otherwise call based on our general statutory reserve testing. Our New York business represents approximately 8% of our LTC statutory reserves. Marty will cover the implications of these 2 issues later in our presentation.

Moving to Slide 3, I want to reiterate 4 significant actions that we have previously discussed that Genworth has taken or will take to improve margins and provide additional detail about these actions. First, Genworth is achieving significant premium rate increases on older policies to bring the policies closer to breakeven. And the estimated per annum increases on these policies as approximately $2.5 billion after tax to the balance sheet margins and our reserve testing. Second, we have after tax hedge gains that reside in accumulated other comprehensive income on the GAAP balance sheet, which benefit our GAAP balance sheet margins by $1.6 billion after tax. And this amount will amortize into income over time. Similarly, we have $865 million of after tax hedge gains on a statutory basis that reside in the interest maintenance reserve or IMR on the statutory balance sheet and the IMR also amortizes into income. Genworth hedged interest rates starting in 2000 and the gains contribute significant margin to our long-term care reserves. Three, Genworth has earned a significant amount of new business over the last several years with tighter underwriting, higher prices and higher returns than on the older blocks. Profits from the newer blocks of business more than offset losses or low returns on the older books and the new business margins strengthen our overall statutory and GAAP margins. Four, the PC Flex 3.0 product, began filing in late November, has projected returns of over 20% and will also add to both GAAP and statutory margins in the future.

As you can see on Slide 4, long-term care insurance returns are largely dependent on managing 4 key risk factors: morbidity, mortality, investment returns and lapse rates. As we've discussed on prior calls, the older generation blocks have experienced significant losses, primarily due to actual lap [ph] experienced that has been worse than pricing expectations. Even with the benefit of the hedging we have done since 2000, the interest rate environment has adversely impacted returns in LTC.

We seek to manage the 4 risk factors in a variety of ways. First, Genworth and its predecessor companies have been issuing LTC policies since 1974, almost 40 years. We leverage our extensive experience in claims and underwriting with over 190,000 claims processed to make changes to our underlying morbidity, mortality and lapse assumption. Experience continues to emerge, which in turn is used to price our new product offering. For instance, our newest product, PC Flex 3.0, will have ultimate lapse assumptions of 0.5% and the annual morbidity improvement in line with our experience. Second, we have also made changes to the product design over time. Last year, we discontinued offering policies with lifetime benefits, as those policies perform worse than policies with non-life time benefits despite the difference in premium rates. We further reduced the maximum benefit period offered on a new PC Flex 3.0 product to a maximum benefit of 5 years, which will reduce the ultimate morbidity exposure. Third, as I already mentioned, over the years, Genworth has successfully implemented tighter underwriting standards, which has benefited our risk profile. Slide 4 shows some of the changes in our underwriting criteria over the last 20 years. Policies issued today require additional cognitive testing and require blood and lab underwritten requirements to better assess certain health conditions such as diabetes that can impact the morbidity of our insurers in future years. Fourth, hedging has been an important tool to help manage investment returns given the long duration of 25 to 30 years on LTC products. With the new PC Flex 3.0 product, we have set the pricing ultimate interest rate at a low rate, 3.25%, that we believe negates the need for hedging. And finally, we are seeking and will continue to seek premium rate increases on both old generation and new regeneration policies where actual experience has either deviated or is projected to deviate from original pricing assumptions. As I said earlier, the major structural difference that I believe will make long-term care insurance business a better business going forward is this concept of annually reviewing experience compared to assumption, set a pricing and pursuing premium increases as warranted.

With that, I will turn the presentation over to Marty to discuss the long-term care insurance balance sheet assumptions and margins in more detail.

Martin P. Klein

Thanks, Tom, and good morning, everyone. Let me start on Slide 5. We have provided a few excerpts from the statutory and GAAP balance sheets that we think are meaningful to investors. We hold 2 main types of reserves, active life reserves or liability for future policy benefits; and disabled life reserves or a liability for policy in contract claims. Active life reserves represent the excess of the present value of expected future benefits over the present value of the portion of gross premiums to determine that issue required to fund expected benefits. The difference between the gross premium and this valuation premium funds both expected profits and expenses. The assumptions underlying these reserves are slightly different for GAAP and statutory reporting requirements but are generally a best estimate of cash flows with the provision for adverse deviation with more conservatism built into the statutory reserves. For both stat and GAAP, these assumptions are locked-in in the euro policy insurance.

Disabled life reserves are held for policies on claim and establish using best estimates for both GAAP and statutory for factors such as morbidity, mortality, recovery and claims continuance. Disabled life reserves are released as claims are paid or in the event a claim terminates as a result of recovery, death or exhaustion in benefits. In general, the assumptions underlying disabled life reserves are updated periodically. The statutory interest maintenance reserve primarily relates to the statutory gains from our hedging program that have been realized over time. This amount is different than the hedge gains in the GAAP accumulated other comprehensive income because of accounting treatment related to Genworth life insurance companies reinsurance of 50% of the long-term care insurance portfolio with our Bermuda subsidiary Brookfield Life and Annuity Insurance Company. Under Bermuda accounting, there is no interest maintenance reserve balance and so gains from hedges accrue immediately to equity. Balances in the IMR amortized in the statutory income in future years and hedge gains in AOCI amortized in the GAAP operating income in future years.

Turning to Slide 6. Today, we are going to present 3 different methodologies for calculating LTC margins. All 3 of these approaches are based on policies enforced and do not include the impact of new business. Going forward, our new PCS Flex 3.0 product is priced with a 20% return and will benefit margins in the future as new businesses added. First, the balance sheet margin is calculated on an after tax basis and uses projected premiums, claims cost, taxes and other expenses based on our best estimate of mortality, morbidity and lapses. We discount future earnings for this calculation at the after tax projected earn rate of 3.25% to 3.6% for this analysis, which is the same for statutory and GAAP. Second, we also are required to file statutory cash flow testing results annually. Statutory cash flow testing is performed separately for each legal entity on an after tax basis and utilizes our best assumptions adjusted for provisions for adverse deviation. Finally, we perform GAAP loss recognition testing at least annually. GAAP loss recognition testing is done on a pre-tax basis. Consistent with our GAAP practice, the discount rate is static based on the portfolio of assets supporting the net GAAP liability as of the calculation date, 5.91% for this analysis, and therefore excludes the benefits of hedge gains that are not currently amortizing.

As the assets for loss recognition testing are capped at reserves less DAC and PVFP, it also does not include earnings on the terminated swaps that have been reinvested. The after tax balance sheet margins, based on the statutory and GAAP balance sheet are laid out on Slide 7. The starting point for the calculation is invested assets as of September 30, 2013, on both the statutory and GAAP basis, which is shown on the top of Slide 7 based on the details shown on Slide 5.

When there is a positive margin using these assets, the no assets other than those backing policy with the liabilities are required to pay future claims. The present value of future premiums, claims and expenses and taxes are projected based on a combination of 2 factors.

First, we utilize assumptions based on our experience as evidence in our actual financial results such as lapse, morbidity and forced assets and in-force rate action approvals. Second, market-based perspectives and outlook are reflected for the potential future outcomes such as reinvestment rates from forward curves and expectations of future in-force rate action premium approvals. Based on these factors, we have set our assumptions for ultimate lapses at approximately 0.7%, 10-year treasury rates ultimately reaching 4.7% by 2023; morbidity with 10 years of future improvement of 1.6%; and mortality with 10 years of future improvement of 1.0%. Our assumption for in-force rate increases is that the annual premiums will increase by $280 million through 2017.

The discount rate utilized in the balance sheet margins is the same for both statutory and GAAP and is the expected after tax portfolio and rate, which reflects our assumption for future treasury rates plus the credit spread based on our investment strategy and the portfolio rate on our existing assets. This discount rate on an after tax basis currently ranges from 3.25% to 3.6%.

Using these assumptions, the after tax balance sheet margins for both statutory and GAAP are solid at approximately $4.6 billion and approximately $4.0 billion, respectively, as shown on Slide 7. Long-term care is a long duration product and movements in key assumptions can impact performance over time. With that as a backdrop, we have provided sensitivities on key assumptions that are roughly 1 standard deviation around our estimates.

Referring to Slide 8, the lapse sensitivity, or sensitivity A, further accelerates the decline in the actual lapse experience we have seen by reducing lapse rates by 25 basis points from the assumption of 0.7% to less than 0.5% on average. The morbidity and mortality improvement sensitivity, or sensitivity B, assumes that the medical progress seen over the last 20 years slows down. Our assumption assumes 10 years of morbidity and mortality improvement averaging 1.6% and 1%, respectively, per year. And insensitivity B, we reduced the annual improvement rising to 5 years. We will show you our historical morbidity improvement trends on the later slide.

The in-force rate action sensitivity, or sensitivity C, assumes that the premium rate increase will only reach $250 million as the question remaining states where we are still waiting decision or in states where we're filed for additional rate increases are not approved at the rate we are currently experiencing. The interest rate sensitivity, or sensitivity D, takes the view that the U.S. economic recovery is further delayed, therefore keeping treasury rates low from further Fed actions. With the 10-year ultimate treasury rate, 110 basis points lower than our initial estimate. We will explain this further on Slide 12.

We have also provided a flat interest rate sensitivity, sensitivity E, that holds treasury rates flat with the 10-year treasury rate at approximately 2.5% through the projection period. While we believe these scenarios are not likely, our statutory and GAAP margins remain solid under each of these individual scenarios as shown on Slide 8.

We have also provided a sensitivity that assumes sensitivities A through D occur at the same time. While we view this sensitivity as quite unlikely, in this scenario, our statutory margin would remain positive at approximately $1.8 billion, while our GAAP margin would be approximately $1.2 billion.

Moving to Slide 9, I'll provide some perspectives on our annual statutory cash flow testing process. Statutory cash flow testing is required by state regulators and required testing assumptions at generally more conservative for all key assumptions. As previously mentioned, the testing is done separately for each statutory filing company. Starting with the balance sheet margin using our assumptions of approximately $4.6 billion, we make 4 adjustments from the balance sheet margin to provide provisions for adverse deviation to get to the cash flow testing basis.

First, we use interest rates that are lower than the interest rate assumption used in the balance sheet margin. Second, ultimate lapse rates are reduced by 25 basis points. Third, we limited the annual morbidity and mortality improvement to 5 years rather than 10 years. And finally, we assume that annual premiums from the in-force rate actions are $30 million less or approximately $250 million through 2017 versus the assumption of approximately $280 million.

The statutory cash flow testing margin for our long-term care business in the U.S. life insurance companies and Brookfield Life and Annuity Insurance Company, after reflecting these 4 adjustments, is approximately $2.6 billion after tax. As a reminder, cash flow testing results that are filed with regulators are done based on year-end data. And the pads as of year-end 2013 may change from the September 30 pads. But we believe the results presented here will be in line with the full year 2013 results in aggregate.

As Tom mentioned, New York has specific statutory cash flow testing reserve requirements that are generally more conservative than other states. In addition to the other interest rate scenarios we evaluate, New York requires us to complete a special test with extra conservatism in a level interest rate scenario. As a result of this special test, we recorded at year-end 2012, and continue to hold, an additional statutory asset adequacy reserve in New York of $120 million.

Moving to GAAP loss recognition testing, or LRT on Slide 10, please note that GAAP loss recognition testing is done at least annually and is performed using a gross premium evaluation where cash flows are discounted at the current portfolio earned rate currently 5.91%. And only reflects hedge gains that are currently amortizing. That is, it does not reflect hedge gains, which begin amortizing in future years.

I want to highlight the 5 GAAP methodology adjustments from the balance sheet approach to arrive at the official GAAP loss recognition testing margin shown on Page 10. First, LRT is done on a pre-tax basis, so assumed cumulative taxes of $1.4 billion on a present value basis are added back. Second, for LRT, while the portfolio rate we discount that reflects the benefit of the gains from terminated swaps, the actual asset proceeds from these transactions are considered capital and cannot be used in this liability-based test. Therefore, we subtract the $2.5 billion of pre-tax hedge gains. Third, the margin and loss recognition testing are discounted on a pre-tax basis and not on an after tax basis as is the case in the balance sheet margin. This further reduces the GAAP LRT margin by $1.5 billion. Next, an adjustment of $1.3 billion is added for the difference in reinvestment range over the projection period.

In LRT, we utilizes static investment rate assumption and therefore a static discount rate. And finally, in LRT, certain allocated corporate expenses and other items are not included in the projections. The present value of which is $300 million.

After making these 5 GAAP methodology adjustments, the actual LRT margin in aggregate is approximately $3 billion, as shown on Slide 10. As I mentioned, we currently use the static discount rate for LRT. If we were to apply a more dynamic reinvestment assumption based on sensitivity D, which I discussed earlier, the LRT margin would reduce to approximately $2.0 billion in aggregate. Finally, we have 2 LTC blocks that are tested separately for GAAP LRT. A Purchased block or PGAAP block and all other policies or HGAAP block. The PGAAP block is about 16% or $2.5 billion of the $15.9 billion of total long-term care net GAAP liabilities. The PGAAP block has a positive LRT margin of approximately $100 million. Given this relatively thin margin, which we have disclosed annually on our Form 10-K, we wanted to provide investors with a sensitivity highlighting the potential for a PVFP and reserve shortfall in the future.

If we were to assume a lower reinvestment rate similar to the flat interest rate sensitivity or sensitivity E, provided earlier and lapses lower than our estimate by 25 basis points, the PVFP write-off or reserve shortfall would be approximately $40 million, pre-tax. It's important to note that this block is much less than its interest rates given its age and therefore lower reinvestment risk.

Beginning on Slide 11, I want to provide some additional perspectives on our assumptions starting with assumed expected and additional premiums per annum from the rate action announced in 2012. Our assumption for the additional premiums from the rate action is approximately $280 million and is made up of 3 parts.

First, we continue to make good progress on the premium rate increase approvals on the 3 older generations or a series of products written from 1974 through 2001 and the 1 series of new generation policies written from 2001 through 2007. As of September 30, we have received approvals representing approximately $155 million of annual premium increases from 31 states.

Second, we are awaiting decisions from 20 states while our expectations is that we will receive approvals representing approximately $50 million of annual premium increases.

And finally, some states do not give us full approval in our initial rate action filings and we will be filing for additional increases in the future in those states. And expect these additional filings will result in an additional $75 million when fully implemented.

Given this progress, we are revising our expected range of annual premium increases to $250 million to $300 million from $200 million to $300 million when fully implemented. On Slide 12, we provide more detail on our investment income assumptions.

In setting our assumption for future treasury rates, we utilized the forward treasury curve as of September 30, and assumed an ultimate 10-year treasury of 4.7% starting in 2023. I would note that this September 30 forward curve has the 10-year treasury rate increasing to approximately 5.5% in 2034 and in 2035, and then following from there. Our lower interest rate scenario sets the ultimate 10-year treasury rate at 110 basis points less than this assumption.

Moving to the morbidity improvement assumptions on Slide 13, we utilize our extensive experience in setting assumptions for morbidity. Our experience shows a consistent trend of improvement in claim incidents rates with each successive generation of underwriting standards. Additionally, the amount of annual improvement within each generation varies by policy duration, issue year and issue age. We have provided 2 examples of morbidity improvement for issue ages of 60 to 70 and centered health that demonstrates the morbidity improvement for 2 product forms. We also see similar trends for our other product forms.

Our assumption for morbidity of 1.6% annual improvements per year for 10 years represents a blended average across all products.

Turning to our lapse assumption on Slide 14. Historical lapse experience has been decreasing by policy duration and has been impacted by factors such as economic conditions, the perceived value to our policyholders of the in-force policies and the in-force premium rate actions. Our ultimate lapse rate assumption of 0.7% is based upon our actual historical experience. With roughly 40 years of experience in this business, we believe we have performed our 3 tests using reasonable assumptions. The alternative sensitivities we have shown indicate how margins would perform under more conservative assumptions.

With that, I will turn it back over to Tom for some closing comments.

Thomas Joseph McInerney

Thanks, Marty. As outlined on Slide 15, we believe our margins in the LTC business are solid in our margins in the LTC business are solid in aggregate and perform well under key sensitivities. Actions we have taken such as pursuing significant in-force rate increases, hedging cash flows and tightening underwriting continue to benefit GAAP and statutory margins. In addition, profitable [ph] new business that we are running today will add to statutory and GAAP margins in the future. But the most important point I want you to take away from today's presentation is that long-term care insurance must be managed proactively with annual reviews of experience and the pursuit of smaller, more manageable rate actions as warranted somewhat similar to how health insurance products are managed. In hindsight, I think the entire long-term care industry would have been better off if it had filed for smaller, more frequent rate increases a long-term care insurance policies as experienced differed from initial assumptions. This would have alleviated the need to deal with current larger increases.

We believe long-term care insurance is an important product for American baby boomers and seniors. When we meet with governors, insurance commissioners and other state regulators, we discussed the following key points: one, we should be outlined in our objectives to have a robust private insurance market for long-term care. Many individuals remain unaware that Medicare does not generally cover long-term care needs. Several companies have already left the LTC market. And if the private market goes away entirely, many Americans will ultimately need care through state Medicaid plans. These Medicaid plans are already paying 25% to 50% of their budgets for long-term care claims. In 15 to 20 years, when the 76 million baby boomers reach the ages where they are likely to need long-term care insurance, the stress and Medicaid budgets will be enormous and even more strained than they are today.

I can say with certainty that state public policy makers are very concerned about this issue. Two, we believe there is an opportunity to educate consumers about the need to buy long-term care. Health stage with their Medicaid budgets and service for long-term care needs of consumers if the remaining private industry carriers and the state and federal government work together. Three, we are working with all the states on the 3-part strategy for Genworth to manage the long-term care insurance business.

First, seek significant premium rate increases on the older generation of long-term care insurance blogs written before 2002 to bring them closer to a breakeven point over time and reduce the strain on earnings and capital. Second, seek prompt approval of new products that are more tightly underwritten with appropriate price benefits using more conservative assumptions. And third, file smaller rate increases on newer blocks as needed to bring them back to original pricing. We are asking the regulators to approve rate actions by focusing on the projected loss ratio versus the actual loss ratio based on experience at the time of filing.

As you know, in September, we began filing for premium increases of 6% to 13% on certain policies written between 2003 and 2012 and we have received approvals from 3 states already. We have worked hard to provide information on long-term care insurance approach, assumptions and sensitivities to show you why we are even more confident with our GAAP and statutory long-term care insurance reserves. We anticipate updating you on our margins annually as we complete the testing.

I am also confident that all the actions we have taken and our new strategic approach will enable Genworth to remain a leader in the long-term care insurance industry and put us in a position to take advantage of the opportunity before us to make long-term care insurance a very fun business for Genworth.

And now we look forward to answering your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Suneet Kamath of UBS.

Suneet L. Kamath - UBS Investment Bank, Research Division

Just a couple of questions about the slides. First, the $250 million to $300 million of additional after tax margin from new business, just wanted to be clear that, that's not embedded in the margin numbers that you've given us?

Thomas Joseph McInerney

That's correct. The margins are only -- the point in time, so in this case, 9/30/2013, and the in-force business as of that date it doesn't consider the new business. I think what we're saying is going forward, we'll project as we do future testing, that the new business would add based on, I think, sales assumptions of $175 million would add that amount per year going forward. But that's not taking into account in the current margin.

Suneet L. Kamath - UBS Investment Bank, Research Division

Got it, okay. And now on the price increases, with the best estimate of $280 million, and I think your low case is $250 million, I guess there's not a huge difference between those 2 numbers. So if we look at the sensitivities, if we wanted to sort of gauge how the reserves might change or the margin my change if we dial back -- or dial down the $250 million, can we use in -- is it sort of a linear relationship and if you want to take it down to say $200 million or something just to stress it a little bit more, would it be sort of a linear approach?

Thomas Joseph McInerney

Well, I would say, we provide that sensitivity on Slide -- where that is, 8. And if that difference of the $30 million is about $0.2 billion, I would say as a general rule of thumb, it's probably okay to do that. But obviously, as you go down, it will change and it will ultimately increase than what I said. But, yes, I think you could use that as a general rule of thumb.

Suneet L. Kamath - UBS Investment Bank, Research Division

Okay. And then, maybe just last last question. On Slide 22, you show us a lot of detail on different blocks that you have in terms of the earned rate and the lapse rate assumptions. Can we assume that on the old blocks, that the lapse rate assumptions of 5% to 5.5% are now -- have been now taking down to that 0.7%. Is that what you mean by ultimate lapse rate? Or is that -- are they still -- are the underlying assumptions still at this 5% to 5.5%?

Martin P. Klein

Steve, it's Marty. No, I think for the margin testing we're presenting this morning, those are the assumptions that we're using as we are projecting out the margins, so we're assuming 0.7%. The numbers that shown on point, on Page 22, really reflect the original pricing assumption.

Suneet L. Kamath - UBS Investment Bank, Research Division

Okay, so everything is kind of at the new levels, right?

Martin P. Klein

Right, the margins are shown at the assumptions that we've presented there this morning which our current best estimates along with some cases of sensitivities.

Suneet L. Kamath - UBS Investment Bank, Research Division

Understood. And maybe just last, I appreciate all the detail. I just -- I don't know if you guys have provided in the past of the various vintages when you talk about the price increases that you've gotten, how those price increases are allocated across these vintages?

Martin P. Klein

Well, basically, I think what we've said, if you look at that Slide 22, we followed the old block, our -- the pre-PCS, PCS 1 and 2, and obviously, you can see the original pricing assumption were significantly higher than what the reality has been. So most of the price increase need is for all those old blocks so that's in general, we were asking for more than 50%. Obviously, we don't necessarily think we'll get all of those upfront and may be spread out over time. But that's where the bulk of $280 million will come from. In addition, on choice 1, which is -- it's an old -- we -- as part of the newer block as we define it, but it's an older version of newer block, so we've used in quarterly calls that terminology and really with the choice 1 block, so on that, we're filing for rate increases of above -- a little above 25%. Again, that's not to say we'll get that. But in all cases on the 3 older blocks and on choice 1, what we filed for if we receive that and we filed per block, that would bring us closer to breakeven on the 3 older blocks. And on choice 1, it would get us closer to the original pricing assumptions. And that's what our goal is, to get the older blocks closer to breakeven. And then for choice 1 and the newer books, to the extent, we need to file rate increases, that's what we do the smaller ones more frequently so that we try to get those blocks back to the original pricing assumptions and the original profitability target going forward, so that's sort of the strategy.

Operator

Our next question is from Jeff Schuman of KBW.

Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division

I wanted to get a little bit understanding around the morbidity and mortality improvement assumptions. First of all, one clarification, is mortality improvement a good guy or bad guy?

Thomas Joseph McInerney

Mortality improvement is the bad guy because the longer people live, in case of long-term care, it would be viewed as "a bad guy" because there's more people around later to claim. In life insurance, it is different.

Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division

Yes. Well that's sort of, I was curious that when you stress the assumption, you reduced the mortality improvement from 10 years to 5 years. That's actually the less conservative assumption?

Thomas Joseph McInerney

I think the improvement in morbidity and mortality offset a little bit to some extent. We do you think, based on our experiences of a very high correlation with all the analysis we've done and I think others have done, so there is very high correlation that I think does seem to make some logical sense. But morbidity improvements and mortality improvements, do work in a little bit different direction. Morbidity improvement obviously is a favorable aspect and mortality improvement is not favorable.

Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division

Can you give us just a little more comfort on the morbidity piece of it. It sounds like some of the historical improvement have been driven by underwriting changes you made historically. But as you think about that in the future, it's just some risk that you don't get to pick up from underwriting changes or is there some risk that cancer and heart disease, treatment improves more than Alzheimers that it could actually go the other way?

Thomas Joseph McInerney

Yes, I think, part of this is as we've done in our analysis and we'll give you some sense for that in one of the slides, we do think morbidity improvement has been around for quite some time. And that we actually had that study that we've done reviewed by outside parties, which corroborated and based on a lot of recordable data we've got from our own experience. I think that part of why we wanted to show sensitivity as well we think in our best estimates that it's assuming it's 10 years is appropriate. We also want to show sensitivity for 5 years because we think that helps provide some investors some idea of the sensitivity in our emergence of that assumption. Because as you pointed out, it's very hard to predict in the over the very longer haul how this can really work.

Thomas Joseph McInerney

And Jeff, I tried to emphasize this in my remarks. But for everybody on the call, we have to remember, going forward, we're going to manage this business differently. We don't have to get everything correct today on morbidity or mortality, or lapse rate interest rate assumption. They're -- we know they will change over time and morbidity could go against us, mortality could go against us, same will lapses interest rates below we think on the new product, that's unlikely. But we can correct for that by seeking these more frequent proactive rate increases. So unlike Life Insurance, which all of you are more familiar with, because you follow that more, this product should be viewed as a health insurance product. And just like what other health insurers do, to the extent that trends go in the wrong direction, we need to see rate increases to bring those back to pricing assumptions. And that's the message I'm giving to regulators is in order to make a competitive private market, you have to manage this business and you have to regulate the business in a way where you recognize that no company can predict interest rates, lapse rates, morbidity, mortality, for 30 years. And again, as I said, in hindsight, I think industry would have been much better off if they had managed the business more like a health insurance business versus life and sought regular price increases of more modest amount that are easier for regulators to approve and more comfortable consumers. And if we have done that in the past, I think long-term care would have been at that much better performing industry. So going forward, I think the major change, and I think Genworth is going to lead on this, would be to move to a process that both the industry, as well as regulators get more comfortable with the fact that you have to allow for this re-rating annually to take into account what may happen over 25-, 30-year duration of the policy.

Operator

Our next question is from Ryan Krueger of Dowling & Partners.

Ryan Krueger - Dowling & Partners Securities, LLC

I had a few clarifications. One, the statutory cash flow testing margin presented of $2.6 billion, just wanted to make sure, is that for long-term care on a standalone basis? Or does that incorporate any other product line?

Thomas Joseph McInerney

We have on a standalone basis.

Ryan Krueger - Dowling & Partners Securities, LLC

Okay, standalone. And then how did you, I guess, treat the reserves that are ceded to Bermuda? Did you use the U.S. statutory methodology for those reserves?

Thomas Joseph McInerney

Yes. So the $2.6 billion represents across all the legal entities for we've long-term care, which includes the Bermuda company BLAIC, Brookfield Life and Annuity Insurance Company, as well as Genworth Life Insurance Company and Genworth Life Insurance Company in New York, it really reflects all 3 of those. The analysis is done separately. It works in Brookfield, it's -- it works very much of the BLAIC should say very much like it does statutory annuities with one exception. And that exception is that the interest maintenance reserve is not reflected in margin in BLAIC because that's already kind of reflected in equity because there's no concept in Bermuda accounting of an interest maintenance reserve. So actually, the insurance maintenance reserve that we have in our U.S. statutory entities of about $0.9 billion. There is no such concept in BLAIC, so that does not benefit the margin from BLAIC. I would say that one of the things we've been looking at very seriously is the potential repatriation of long-term care business in BLAIC we've provided some disclosure on our previous calls about what that would look like and again given the amount of capital we hold currently in BLAIC, as well as the amount of capital we hold than U.S. life companies, we really don't think there would be a significant impact to RBC ratios that we did the repatriation.

Ryan Krueger - Dowling & Partners Securities, LLC

Okay. And I assume also if you did the repatriation really none of the -- essentially none of the analysis you provided us today which really change, it sounds like.

Thomas Joseph McInerney

Right. There would be no impact at all in the analysis because it really is included in the analysis. So it really it have no effect on the margins.

Ryan Krueger - Dowling & Partners Securities, LLC

Okay. And one last one. Do you have an update on GAAP allocated equity for long-term care? I think you disclosed it a few years ago but not recently.

Thomas Joseph McInerney

Yes. It's not something that we have been disclosing. Obviously, we get a lot of requests for disclosure and that's something we may give consideration to. No, we don't have an update on that this morning.

Operator

Our next question is from Sean Dargan of Macquarie.

Sean Dargan - Macquarie Research

If we look to Slide 8 and in column of, instead of sensitivities A through Ds, if we replaced D with E, what would that number look like? So in other words, just assume that the 10-year treasury rate remains at 2.5%.

Thomas Joseph McInerney

Okay. I would ballpark it as they would have a comparable impact to what it shows by itself, just ballparking it. It will be exactly equal to that, but it would give you a kind of a rough estimate of it.

Sean Dargan - Macquarie Research

All right. And then on Slide 22, which I think is very helpful, you showed the evolution of the products by vintage. When we think of new claims, when -- in how far after a policy is written on average do you receive the claim?

Thomas Joseph McInerney

Sean, the average age of policy issuance is 58 and the average age at claims is 79.

Sean Dargan - Macquarie Research

Okay. And just one last question. When you put through these fairly significant pricing increases, why aren't you assuming some sort of shock lapse? I mean should lapse pickup for 1 year or 2 as policyholders besides they don't want to pay the additional premium.

Thomas Joseph McInerney

Sean, as we've disclosed on the last call, obviously, we have quite a bit of experience now with what policies are, policyholders are actually doing when they see these or see these large rate increases. Just to repeat, 83% are accepting the full rate increase. And I think the reason that 4 out of 5 were doing that is because even with the rate increase, these are very valuable policies. And remember, with the rate increase, we're only getting those policies closer to breakeven, so it's still a good deal. And I think they and whoever is advising them are making good decisions there. About 12%, if we allow anyone to take a reduced benefits so they don't have to pay any increase so they can take some reduced benefits and pay a smaller increase, about 12% are doing that. And then the balance are -- which is 5%, are either taking the non-perpetual options or lapse. And I think it's less than 1% lapse. But even for those that are lapsing, we're giving them the non-perpetual option. And what that means very simply is whenever premiums they have paid to-date less any claims that they have made or payments we've made on claims, they get the value of those premiums so they don't lose that. And one of my compromises with regulators has been -- they have been worried about the fact that there could be a lot of lapses and people would forfeit the premiums they paid. And so we have -- while in many cases people would have qualified for that non-perpetual benefits, we have agreed with regulators that we'll give that to everybody. So our actual experience is that when you look at actual lapses, it is -- you don't see the shock lapses that you might expect. And I think the reason for that is pretty straightforward and simple in that despite the percentage increase, the actual amounts are such that people would much rather pay an extra $50 or $100 a month to keep, in most cases on these old policies, an unlimited benefit so it's still a very attractive policy for them including the full rate increase.

Operator

Our next question is from Thomas Gallagher of Crédit Suisse.

Thomas G. Gallagher - Crédit Suisse AG, Research Division

I had a first question on Page 13. The -- I guess, I'm a little confused by this. Should I take this to mean that your morbidity experience has been steadily improving over the last several years or is this new generations of products have had better morbidity experience than the older generation? Because from listening to what everything I've heard in the industry, claim trends and morbidity experience has worsened as of the last several years, I just wanted some clarification on that.

Thomas Joseph McInerney

No. Actually, the morbidity improvement we've seen goes way back, in fact, if you look at Page 13, we will compare on the left side chart, business written back in 1995 and '96 and then a more recent generation of that '97 and '98 and then do a comparable analysis with more recent vintages. And now we've certainly seen that kind of a long way. I think that what we see is while there is an improvement in morbidity incidence rates, I think that some of the -- some people think about long-term care sometimes think about increasing loss ratios, increasing claims, and confuse the reasons there's increased claims is really because of persistency of lapse rates which have been much slower to what most companies have originally priced for. So because of those lower actual lapse rates, there are more people around, more policy around in later durations that then go on claim. And that's where the reason for higher claims. It's not really morbidity incidence rates.

Martin P. Klein

I want to go back just one more point, and to go back to the previous question from Sean. If we didn't take public policy and fairness issues into accounts, Sean, I would say that the best outcome for us would be everybody lapses on these old policies. And so again, I want -- because if there's a concern that you have or other investors have or analysts that shock lapses, in this case, shock lapses would be good. However, from a regulatory and public policy perspective, we think that's very important that the policyholders that have been with us for a long time and are paying claim -- and then, paying premiums rather, that we keep most of them as policyholders because of the value in the policy. So I think it's working out very well and I think the regulators are quite pleased that despite these very large increases, most policyholders are keeping their policies. I think they also feel maybe these rate increases aren't so bad from a political perspective or and thinking about consumers because most consumers are accepting them so I think that has given the regulators additional comfort that what we're doing, while certainly policyholders don't like rate increases, it still ends up being a fair deal after the fact. But I wouldn't want either go away whether there is a big risk to the extent that we -- things change and we have more lapses.

Thomas G. Gallagher - Crédit Suisse AG, Research Division

And Marty, I wanted to come back to on your response. The -- So if I understand it correctly, the incidents per unit has actually been getting better but there's just more units outstanding and that's why you've seen unfavorable claims trends as a whole. Is that the right way to think about it?

Martin P. Klein

I think that's the right way to think about it, yes.

Thomas G. Gallagher - Crédit Suisse AG, Research Division

So I guess, my question is -- I thought regulators would only grant re-rates on the basis of adverse morbidity and that they wouldn't grant re-rates on the basis of missed estimates on interest rates or lapsation. So how, if, in fact, your morbidity is getting better and maybe I'm miss-understanding that but I've been pulled up by some other companies, so if actually your morbidity is getting better, how are you able to get the re-rates you're getting?

Martin P. Klein

So at time, I've met with many, many regulators, commissioners, governors and et cetera. And what we're explaining to them is that on these old policies, all of the assumptions turned out to be not accurate as things played out. And therefore, actuarially, in order to get these policies closer to breakeven, we need the rate increases we're filing for and I think we're doing well there. And I do think, and I said this in my remarks, this is based on meeting with a lot of governors, a lot of insurance commissioners and other regulators, a lot of head of Medicaid programs in the state, that with other LTC carriers leaving the market, that we've lost about 30% of the capacity, our market share is 35%. So if we were to leave, that creates reasonable shrinkage in the overall market. And I do think that regulators do recognize that if they want to keep an active competitive private market, they have to step back and consider looking at long-term care and the increases from a different perspective. And I think, generally, that's something that they're prepared to do. There is quite a bit going on at the NAIC and various task forces on the NAIC around long-term care to try to move forward on the basis that works well for consumers, and policyholders is acceptable and prudent in terms of what the carriers are doing, the risks that they're taking. And ultimately, the regulators feel comfortable that balancing all the things they have to balance that it's coming out in a good place. So I do think that regulators do understand that, particularly on the old block, the aggregate of the original pricing assumptions versus the reality of what actually has happened, there needs to be an adjustment on the rates -- the premium rates in order to bring those more in line. And particularly for us, we're just asking that we bring those closer to breakeven over time.

Thomas G. Gallagher - Crédit Suisse AG, Research Division

Got it. And my last question is, have you all looked at insurance trends a different age cohorts, for instance? And I -- to your Slide 13, it says you've seen improvement across all policy durations issue year on issue age. But I'm just curious, if you've seen an overall, how we should be thinking about the loss ratio. Has that look meaningfully different, let's say for anything younger than age 80 and over age 80? And the reason I asked is, I think the confusing aspect to this is the incidence of Alzheimer's and dementia and what that means for the 80 and over booked, if we should be thanking about that?

Martin P. Klein

Yes. I think we do see, generally morbidity improvement largely across the board. It does vary, to some extent by age, and we certainly do look at that, we haven't really disclosed that this morning. I think the other thing that we see is that in addition to people going on claim -- I'm sorry, I'm trying to read something here. I'd say that we have very credible experience on the 190,000 claims that we look at. And I think that experience is pretty credible all the way up to the upper ages, as well under the late 80s or early 90s. And certainly, the incidence of Alzheimer's is something we're watching very closely. I'd say that 50% of our claims are for what we would call cognitive disorder, so it certainly is a big issue. And that's also why we track it closely and to Tom's earlier point, we want to make sure that as we're looking at our business and we're going to do this on a much more frequent basis, we want to track all those things and apply for rate increases as see experience deviating from a pricing assumption. But certainly, with 50% of the insurance coming from cognitive disorders, it is something that we watch very closely.

Thomas G. Gallagher - Crédit Suisse AG, Research Division

And -- sorry, and just one more, just lastly, just to be clear, the last year or 2, you've continued to see an improvement in morbidity.

Martin P. Klein

Yes.

Operator

Our next question is from Ed Shields of Sandler O'Neill.

Edward Shields - Sandler O'Neill + Partners, L.P., Research Division

Several of my questions have been answered already but I've got a couple here. First, what's the rate that we can assume for the hedges to amortize into the income statement going forward? It's certainly not going to be linear but what any expectations that you can help us have here for the impact on the income statement would be useful.

Thomas Joseph McInerney

Sure, and I'm going to turn it over to Amy Corbin.

Amy R. Corbin

This is Amy. Thanks for your question. With regard to looking at our income statement, if you're thinking of stat, I would expect about a consistent trends about $50 million per year. If you're thinking GAAP, what we tend to see is about the same amount, but as we are approaching more of our amortizing swaps, we expect that trend to rise and get over $100 million in the next 5 years.

Edward Shields - Sandler O'Neill + Partners, L.P., Research Division

Great. Second question I have is, well, it kind of relates to your paid loss experience in the product here. If you can give us any kind information about the paid-loss trends and what variability appears and whether you see some cyclicality to it like 1 quarter is worse, short or higher than another? Any information here will be beneficial as well.

Thomas Joseph McInerney

We do see, during the course of the year, a little bit of seasonality and claims incidence to think that we tend to see it maybe it's a fun around where people go home and spend time with their folks during the holiday season, and begin to see some things they maybe haven't seen earlier in the year. So in the first, say, half of the year, we do see a little bit of higher paid claims that we may be seeing in the back half of the year, of the calendar year. We see a little bit of that during the course of the year.

Edward Shields - Sandler O'Neill + Partners, L.P., Research Division

Any other notable trends in paid loss in general over the past several years?

Thomas Joseph McInerney

Nothing notable that comes to mind.

Operator

And our next question comes from Joanne Smith of Scotia Capital.

Joanne A. Smith - Scotiabank Global Banking and Markets, Research Division

I have a couple of questions. The first, I just want to go back to the discussion regarding the morbidity and mortality on the sensitivities. And I'm not quite sure the question was answered as to whether the change in the mortality assumption is more or less conservative.

Thomas Joseph McInerney

Morbidity improvement is a bad guy, right, so it hurts result, right. Because the mortality improvement is not a favorable development because the longer people live, in the case of long-term care, the more folks there are so they can go and claim later on.

Joanne A. Smith - Scotiabank Global Banking and Markets, Research Division

So am I to understand that the change from 10 years to 5 years of the mortality improvement is suggesting that the mortality improvement gets better faster and so that's worse, correct?

Thomas Joseph McInerney

Yes, what we find again is that there's a high correlation between morbidity improvement which is a good guy, favorable development and mortality improvement which is a negative. So those things do go essentially hand in hand. Morbidity improvement, the combination of the 2 is generally a positive thing, but our best estimate assumptions are based on 10 years of improvements in morbidity and mortality. Again, those things offset to some extent, but net-net are a positive if we had looked and see that improvement in those 2 areas continuing from 5 years, then that obviously has a sensitivity impact on the margins that we disclosed of about $0.8 billion.

Joanne A. Smith - Scotiabank Global Banking and Markets, Research Division

Okay. And then my next question is regarding the discussion that you're having with the regulators about how the long-term care business should really be looked at more as a health insurance product rather than a real life insurance product. And I'm wondering if we get to that point where the regulators are fully accepting of that if we're going to get to some type of situation where they're going to start mandating annual loss ratios and thinking of similar things that they've done maybe with like medicare supplement policies and things. And I'm wondering if that might not necessarily be a dangerous road to go down?

Thomas Joseph McInerney

So Joanne, I believe the way that the business should be managed is that the health insurance policy, and I'd say that's a regulators. And I've run health insurance businesses and life businesses over time. And I just think they are to be treating among some care, similarly to how they regulate health insurance. Now that's an ongoing debate, different regulators, commissioners, governors, others have different opinions on that. But I am going to be pushing very hard going forward that we change the way that the business is regulated, because I believe that it is impossible to be in this business long-term if you have to set all of your assumptions based on the date the policy is issued and you can never change or re-rate the policies in your sort of stuck on the risk without an ability to re-rate with over 30-year duration, interest rates will change, lapses can go up and down, morbidity, mortality, all of innovations in medical science. I feel quite strongly that, that is needed. We need that regulatory environment. I'm not saying the regulators at the end will agree. But if they don't and we're sort of back to where we've been for the last 4 years and that you can't get smaller, more proactive increases because I think that's much better for consumers to get a 2%, 3%, 4% increase more often. And they're used to that under Medicare premiums, et cetera, those are -- that's sort of normal in this space. Why all of us in the industry and regulators didn't view this as a business that where you really had to change the assumptions over time, I think made it a very difficult business to manage. I would say I wouldn't be comfortable as the CEO of Genworth going forward in this business if at the end the regulators come out in a place where they won't allow us to get these smaller more proactive rate increases, so that we can get things back on track and to the price roll off ratios when we file. And that's exactly how regulators manage health insurance. And so to me, this is different than health insurance, but it's much more similar long-term care to health insurance than to life insurance.

Joanne A. Smith - Scotiabank Global Banking and Markets, Research Division

I guess my question with respect to how the regulators are going to react to that is health insurance is one thing it terminates on a private basis at some point in time, whereas this does not necessary terminate. And if people are getting continual 2% to 4% rate increases at some point, maybe if they get closer to actually meeting the policy, they can no longer afford it and they lapse. And I wonder how those discussions with the regulators go?

Thomas Joseph McInerney

Again, I think, you have to look -- I would compare long-term care to Medicare health insurance. And I do think in Medicare, the premiums do go up every year. And one way or another, consumers have to pay those premiums and going forward, there may be subsidies, et cetera. We are working with state and federal government, I mean I do think we may need to look at that issue. Obviously, going -- what we've been doing on our new products, we've been trying to keep the ultimate price point, the actual annual premium similar to what it's been. These are experience, I would say, overall consumers soon be comfortable paying premiums in the 2 to 3.5 billion range at the average issue year. And so what you're seeing is on the new products, we are keeping the pricing at the same range by capitative coverage more. And I think you also, when we do these rate increases, we do allow policyholders, they can pay the full premium, they can decide not to pay any increase. And that what will happen is it will reduce the benefit. And in fact, on average, I mean it varies a lot, but on average, if a policyholder gets a greater than 50% increase from Genworth, they don't want to pay that. They want to pay exactly what they've been paying. In general, the lifetime coverage would be reduced to somewhere in the 4, 5 year range. And that's also consistent with the new products are being done. And finally, I just want to repeat that if the policyholders decide not to pay any premium and they don't want the policy anymore, we do give them a nonforfeiture option so all the premiums they've paid-in up to that point can be used down the road for the claims if they should have them.

Operator

Our next question is from Steven Schwartz of Raymond James.

Steven D. Schwartz - Raymond James & Associates, Inc., Research Division

I want to go back to the question of mortality and morbidity and maybe this clears it up. Morbidity is a reference. Improvement in morbidity means that if you want somebody was going to take advantage of the policy going to a facility or whatever at the age of 80, if they go in at the age of 81, that's an improvement in morbidity?

Thomas Joseph McInerney

Could you say that last part again, Steven.

Steven D. Schwartz - Raymond James & Associates, Inc., Research Division

Yes, is improvement in morbidity, does that mean that people use the policy later than you thought they would?

Thomas Joseph McInerney

Basically, it's the incident. The way we look at it, and as we model it out is as the incidents rate, you have issue ages and then you policy years after that. And what we're seeing is that we are having this improvements in incidents rates generally across the population of what we have, so that the rate of people claiming is generally it been getting lower at this on average, kind of 1.6% type of rate per year. The other thing that effects overall morbidity is severity, which for us has been basically flat for the last several years. You think about a couple of things that impact claims, it's how frequently that people claim, which is the incidents rates that we've shown on Page 13. The other aspect of it is what's the severity of that claim, how long will the claim, what's the amount of the claim and so forth. And that for us has been basically flat.

Steven D. Schwartz - Raymond James & Associates, Inc., Research Division

So if you -- just so I understand this, if you're originally assuming, you sold 100 policies and you were originally assuming that 50 people would eventually use the policy, you're saying that less than 50 people are going to actually use the policy?

Thomas Joseph McInerney

Yes. That's right. Yes, there's fewer claims, the number of claims has been improving. But keep in mind that, that's morbidity. Again, you have to look at all the factors sorted together, so even though the incident of our policyholders is getting better through better morbidity, because lapse rates have been much lower than expected, there are a lot more policyholders that are still policyholders. And therefore, that's why, net-net on the old policies, why we have seen significant losses is primarily -- even morbidity, mortality has had an impact. The net of that is probably an improvement, because the net of those 2 things together has improved. You've got to look at them together. But they have been more than offset in a much more significant way by the fact that if you look on that Slide 22 and we were assuming 5% lapse rates and they're now on average, our experience has been less than 1%. So that's really a big driver. And, of course, since we first started in this business in 1974, we've been in a 30-year plus secular reduction in interest rates and that has also had an impact. So when it's all said and done, I think morbidity, mortality matter. It's generally probably been in that positive. If you don't -- if you assume on our sensitivity 5 years versus 10, it shows that the combination of those 2 factors, the better morbidity has sort of offset the longer lives, but will really has sort of on the old is that the lapse rates, we assume -- I think they are reasonable at the start, but it's sort of the average of lapse rates we get on life for health policies. But I think because of all the factors together, these have become such valuable policies that offer lifetime benefits in the past that people aren't lapsing because they see, from a cost-benefit perspective, it's been a very good deal as it's turned out for them.

Steven D. Schwartz - Raymond James & Associates, Inc., Research Division

Okay. Let me try this one more time then. You start with 100 people. At the end of the day, you have 50 people and 25 of those use the policy. Maybe that's what you started your assumptions. And today, you're finding that you start with 100 people, you've got 80 people at the end of the day, 40% use that, so you've actually got 32 people relative to 25 who are using the policy?

Thomas Joseph McInerney

Yes, I think, that's a representative example. Obviously, the numbers will be different but again, these is 2 factors which offsets the improved morbidity incidence rates, which have a decreasing impact on a number of claims. But then the difference in lapse assumptions, which increases the amount of claims and as Tom pointed out, the combination of the 2 has resulted in net increase in claims because that was the bigger impact on our pricing assumptions is the difference in actual lapse rates.

Steven D. Schwartz - Raymond James & Associates, Inc., Research Division

Right. And improvement in mortality is now only going to lead to more people holding onto the policy than they haven't passed away but they're also presumably going to live longer on claim?

Thomas Joseph McInerney

Correct. Yes. Lower death rates and lower mortality rates basically mean people allow longer to claim, so that would increase the number of claims and lower morbidity incidence rates decrease the number of claims, so there's 3 different dynamics going on.

Operator

Our next question is from Jimmy Bhullar of JPMorgan.

Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division

You present a good case for why your policies are better underwritten or better priced. But at the same time, you've actually -- you're applying for price hikes on business that you've sold even in the last couple of years. So maybe if you could discuss the rough magnitude of price hikes on 2011, 2012 business, and also discuss what the assumptions are or what the key drivers are that have varied from your pricing assumptions on those vintage years?

Thomas Joseph McInerney

Okay. So if you look at Slide 22, Jimmy, those policies that we are applying for the -- and it's 6% to 13% of the choice 2 blocks, so those are choice 2, 2.1. And as you can see, basically the lapse rates that we assumed originally were 1.5, and we're again, we're filing on average at 0.7 at the ultimate, so part of the increase is correct for that. Obviously, because we're catching it earlier more proactively, the amount of increase to correct is smaller. And the same, we -- at 5%, I mean, the interest rates, obviously, if you look at your money today, it's probably new dollars are being invested again on average. Our rule of thumb is the treasury plus 120 basis points are actually a little bit better than that. So again, there's some impact there from that. So what we're doing in the choice 2 and 2.1, which is unlike the old blocks, with the old block, we're just trying to get to breakeven. On choice 2 and 2.1, we're trying to get back to the original pricing assumptions and the original price for loss ratio. And on the PC Flex, flex 2.0, on 2.0, you can see we're much closer til we actually think in terms of were interest rates are today and the lapse rates of 0.7. But things could evolve differently or as some of the earlier questions, the combination of morbidity and mortality may mean in low lapses, more people living longer, making claims, et cetera. And again, as we see that, I think the only way to manage this business is you have to apply for small increase to get you back on target with the price for margins and loss ratios. And again, that is my main point to the regulators is I think that's a better way to manage the business, because it will result in much smaller price increases. And maybe we may find PC Flex 2.0 and 3.0 that the assumptions hold for the next 30 years, we never have to do a price increase. So I do think that those are probably starting out being more conservatively priced, they're clearly more conservatively underwritten since we're doing a lot more cognitive testing in the labs and all the bloodwork. So that is the point we're trying to make. So on choice 2 and 2.1, it's 6% to 13%. We are asking the regulators to look at projected loss ratios versus actual because right now, on those block to loss ratios are in the single digit. What we know based on these assumptions and where we are and based on our overall assumptions that Marty covered that we need some increase. And we filed these in September and we've already received 3 approvals from states. So clearly, it does appear that the state -- I'm not saying that all the states will get on board with this right away, but I do think that we are making progress on that front.

Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division

And your success rate in convincing the regulators on the last couple of years have been increasing prices or are those similar to your overall success in raising prices, more or less?

Martin P. Klein

Yes. I think, overall, I think we've had reasonable success. And I do want to commend the regulators. I think they have a lot of things to balance and including a lot of consumer advocacy and what consumers. And particularly, they're sensitive on these consumers because in general, they're older ages and they look at affordability and all of that. So I think they're balancing that. They also have a responsibility to the companies to allow for reasonable rate increases as things evolve and assumptions that we price were turn out to be much different. So I think, collectively, and it's going to be a moving process and I take a very accommodative approach with regulators. I think it's very important from a public policy perspective that we have a private market for long-term care. I think, certainly the governors and the head of Medicaid in all the states, they're already paying 25% to 50% of the Medicaid budget. Today, that's supposed to go to poor for long-term care payment. They never expected that, and they know they're facing 76 million baby boomers who, let's say, 1/3 of which, may be more, are going to ultimately make long-term care claims. So I think they also want to create a regulatory environment. Obviously, that protects the consumers and existing policyholders in future. But they also need to make the business manageable for the insurance carriers, so there's enough carriers that stay in the business so that there's a reasonably robust competitive market for long-term care. And so I do think at the end of the day, as I meet -- I've met with many of them, insurance commissioners and governors, I think they do want to work with us. They will be obviously more concerned about the impact on consumers. And I think they should, that's part of their job. But I do you think in the end, we're going to come out in a place that allows for a robust competitive market for long-term care.

Thomas Joseph McInerney

One thing, Jimmy, as a sidebar is in this recent rate actions, the 6% to 13% non-choice 2 products, they have not included in the margins here. It's not to say we don't expect to get premium from those. We actually do, but we do not reflect any of those premium increases in the margins that we presented this morning.

Operator

Ladies and gentlemen, we have time for one final question. Our final question is from Craig Perry of Panning Capital.

Craig Perry

I just had a quick question, sort of a follow-up on Slide 22 and really it's more of a summation so I can just contextualize and understand kind of where we -- may I think is called a great job of kind of outlining as it was supposed to your reserving policy and helping us think through essentially the legacy book. But you have not spent much time talking about sort of the new book. In particular, the PC Flex 3.0, which I guess you just filed and start selling. The comment you thought you would make 20% ROEs is new and obviously very interesting to some of us. Can you help us think through Slide 22 if we're staring at this slide in 2 years, what is the blended -- it looks like there's sort of $600 million of old enforced block, which with the combination of legacy rate increases, you're sort of hoping to get a breakeven and the new block is $1.5 billion. I guess returning to PC Flex 3.0, I guess you sort of said $200 million or so. Can you help us think through sort of in 2 years, how we're supposed to think through the blended ROE of that -- of this business given the developments that you expect in sort of giving the trend you have some actual experience to sort of think it through. Can you help us think through sort of what the blended ROE would look like in 2 years on all these sort of long-term care sort of within the range?

Thomas Joseph McInerney

Craig, at a very high level, I would say you look at the old blocks as the goal. If we get the price increases, we're assuming we'd get those closer to breakeven so no return or modest negative return. I think on the PC Flex, flex 2.0 and 3.0, we would expect returns on those to be 15% or better. I think flex 3.0, at this point, we would say 20% or better. And then on the choice 1, choice 2, choice 2.1, I think there'll be double digit. Where they end up is a little bit unclear because that's where we have to go to this new regulatory process.

Martin P. Klein

And then also I'll just add that over the next couple of years, our flex 3.0, you can see how does the market but we'd expect to sell between $150 million, $175 million and maybe $200 million over the next couple of years per year.

Craig Perry

With your per year, so your total in-force premium in 2 years could be about $300-ish million, I mean, depending on uptick and all other things, I'm just trying to...

Martin P. Klein

Yes, it sounds like that. And then obviously, if you look at the really old block, if you look at 3 PCS, you have a [indiscernible]

Craig Perry

And where do we think -- I'm sorry, just based -- I apologize, just based on the K before you answer that question, does the old block of 600 that you're hoping to get to breakeven in 2 years based on sort of lapse rates and sort of actual mortality experience, use the 600 or 500 or how does decay based on the existing age profile people live there?

Martin P. Klein

Yes, I mean if you think about the old block and you can look at, see average attained age, at some point, the course of mortality as the actuaries call it, it really begin to take effect in a very big way. So I think you will begin to see the pre-PCS block begin to decline in the lives in-force. Obviously, premium will change because of the rate actions. It go up a bit. But the lives in-force will begin to diminish over time. So you begin to see that, I don't know that maybe 1 year or 2, it's going to be too significant. But over the next 5 to 10 years, you'll begin to see some of those older blocks begin to roll off the books, if you will.

Craig Perry

Yes, that's very helpful. So in the words of sort of Forrest Gump, I'm not a particularly smart man but if I think through this sort of in 2 years, you would certainly be on target to be kind of in your double-digit ROE business for the long-term care business?

Martin P. Klein

Yes. I think, you had point out that on the older block, in some of these other rate actions that they do take time to take effect, right, so we are...

Craig Perry

Right. It doesn't all come into the P&L statement.

Thomas Joseph McInerney

We're still implementing the rate actions on the old block, if you will. And those are beginning to take effect in our earnings but truly going to be another 2, 3 years. And, overall will be probably a 3 to 5 year time frame as those will begin to take hold. And then similarly, we just begun filing this last few months on the choice 2 products. And again, that takes 2, 3, 4 years to kind of begin to take effect. So 2 years out, you'll begin to see some improvements for sure but it's not as those rate actions will be fully in effect at that point of time.

Craig Perry

You're sure about from a perspective of somebody who, whatever, just doing discounted cash flow, that doesn't really matter. I mean, if I know I'm getting it a year or 2 years from now, if it shows up, it doesn't show up, it doesn't really matter. We know it's there, so, yes, I appreciate that.

Operator

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

Thomas Joseph McInerney

I want to thank all of you for joining us today and all of your questions. Obviously, this is a complexed business and we have 40 years of in-force policies so it's challenging to understand. But I do want you to know that Marty and I have spent enormous amount of our time with weekly meetings with the team, so I think we have really dug into all of this and all these numbers. I think we feel very comfortable that we understand how it all works and how all the risk works. And we hope that you found the information that we provided around our long-term care balance sheet and the assumptions helpful. We'll consider over time input you give us in terms of how we can make further improvements to disclosures and transparency. Obviously, this is significantly more disclosure that we or the industry has done, so I hope you all appreciate -- do appreciate that. As I said, Marty and I, I think the whole team here having spent 4 months and a lot of time and effort. We're now becoming increasingly confident that we can proactively manage the business. And, obviously, we need to work well and we're very willing to work with states, governments on this and potentially, the federal government. We do think that we've learned a lot and so in our new PC Flex 3.0 policy that we just filed on November 26. We fired it through the compac[ph] so there's 38 states in the compac [ph], so hopefully we'll get approval at a reasonable amount of time there, then we'll also file in the other state. We do expect returns in excess of 20% on that. And so given all that we're doing to improve the existing business and the new business, we really do believe that the long-term care business for general it represents significant opportunity for us going forward.

Operator

Thank you. Ladies and gentlemen, this concludes Genworth Financial's Long-term Care Insurance Investor Conference Call. Thanks for your participation. At this time, the call will end.

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