Genworth Financial, Inc. (NYSE:GNW)
Q2 2014 Results Earnings Conference Call
July 30, 2014 8:00 AM ET
Amy Corbin - Senior Vice President, Investor Relations
Tom McInerney - President and CEO
Marty Klein - Chief Financial Officer
Kevin Schneider - President and CEO, Global Mortgage Insurance Division
Jerome Upton - Chief Financial Officer, Global Mortgage Insurance Division
Elena Edwards - President, Long Term Care Business
Dan Sheehan - Chief Investment Officer
Sean Dargan - Macquarie
Nigel Dally - Morgan Stanley
Suneet Kamath - UBS
Geoffrey Dunn - Dowling & Partners
Ryan Krueger - KBW Investment Bank
Please standby. Good morning, ladies and gentlemen. And welcome to Genworth Financial’s Second Quarter 2014 Earnings Conference Call. My name is Heather, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this conference call. As a reminder, the conference is being recorded for replay purposes. Also we ask that you refrain from using cell phones, speaker phones or headset during the Q&A portion of today’s call.
I would now like to turn the presentation over to Amy Corbin, Senior Vice President of Investor Relations. Ms. Corbin, you may proceed.
Thank you, Operator. Good morning, everyone. Thank you for joining us for Genworth’s second quarter 2014 earnings call. Our press release and financial supplement were released last evening and this morning our second quarter earnings summary 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 Marty Klein, our Chief Financial Officer. Following our prepared comments we will open the call up for a question-and-answer period.
In addition to our speakers Kevin Schneider, President and CEO of our Global Mortgage Insurance Division; Jerome Upton, Chief Financial Officer of our Global Mortgage Insurance Division; Elena Edwards, President of our Long Term Care Business; and Dan Sheehan, Chief Investment Officer 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 maybe meaningful to investors. In our financial supplement, earnings release and investor materials non-GAAP measures have been reconciled to GAAP where required in accordance with SEC rules.
Also when we talk about international protection and international mortgage insurance results, please note that all percentage changes exclude the impact of foreign exchange. And finally, references to statutory results are estimates for the quarter due to the timing of the filing of the statutory statements.
And now, I’ll turn the call over to our CEO, Tom McInerney.
Thank you, Amy, and good morning, everyone. Thank you for joining us for our second quarter earnings call. I will cover three points today and then turn the call over to Marty for a more detailed review of the second quarter.
First, I will make a few comments regarding Q2 ’14 results, then I will discuss our plans with regard to compliance with the new GSE standards and finally, I will talk about the progress we're making on a long-term care insurance strategy.
Before I begin let me take a moment to comment on Jim Boyle’s decision to leave Genworth. As was announced last night, Jim has accepted the position of Chairman at HealthFleet, Inc., while I'm sorry to see him go, I respect his decision to leave the company and return to the New England area.
I've enjoyed working with Jim and on behalf of our Board of Directors and all of Genworth employees I would like thank Jim for his thoughtful and steadfast leadership. I wish him well in his future endeavors.
As you know, I have devoted much of my 18 month at Genworth, helping to develop a new Genworth LTC business model and working closely with state and federal government leaders and regulators to change the regulatory framework for the LTC insurance market.
Therefore, the Board and I believe it makes sense that I assume the additional role of CEO of the U.S. Life Insurance Division until we are further along in the development and implementation of the new LTC business model, and we have greater visibility into the go-forward regulatory framework.
Now let’s turn to 2Q ’14 results, except for our long-term care business, I'm encouraged by Genworth’s second quarter results. Turning to slide four of our 2Q ’14 earnings summary presentation, net operating income was $158 million, 19% above 2Q ’13.
We are making great progress in each of our three core mortgage insurance platforms and GMIs operator earnings of $136 million show these positive trends. Canada and Australia continued to perform very well with operating earnings of $47 million and 57 million, respectively, a loss ratio of 12% and 23%, respectively.
U.S. MI had another excellent quarter with operating earnings of $39 million and a loss ratio of 43% and the 2009 forward mortgage insurance books represent 50% of our risk-in-force.
As many of you know, on July 10th the GSEs released the new Private Mortgage Insurer Eligibility Requirements. Slide 26 summarizes these new eligibility requirement, although, they could change depending on public comments and the final decision of the regulators and the GSEs, we now have enough of the regulatory framework to take additional steps towards compliance.
We intend to be compliant with the new capital requirements on or before June 30, 2015, and believe compliance by this date allows U.S. MI to continue to play a strong role in the mortgage insurance market.
Our ability to be compliant by this date is dependent upon market availability, performance of our businesses and the absence of any unforeseen development. Of the sources of capital identified in our July 10th press release, we now have a specific priority for these resources in order to address the requirement.
Given where the reinsurance markets are, we currently see multiple reinsurance options and will work to execute the reinsurance solution to address the majority of the capital need.
If any shortfall remains after reinsurance, we expect to fund a shortfall with a portion of the $514 million of the net proceeds from the Australian IPO. Given our focus areas, we currently do not have plans to raise equity to fund the capital need.
U.S. MI is a core business for Genworth and we expect the business to be an important contributor to Genworth’s results in future. Despite the higher capital requirement, U.S. MI remains one of our best business opportunities, given our strong market position and return on equity, even credit characteristics we have been pricing new business assuming risk-to-capital of approximately 15 to 1 targeting returns in the midteens.
We believe even after the new requirements going to affect, new books of business in aggregate can continue to maintain returns in line with our expectations. We remain committed to ensuring that the private mortgage insurance market continues to grow with adequate returns. To that end, we will continue to work with the GSEs and FHFA to make a proper refinement to the guidelines and move to implementation.
Turning to our U.S. Life Insurance Division, our life and fixed annuity businesses achieved operating earnings of $39 million and $24 million, respectively. Life results were above what we expected and fixed annuity performed above our expectation.
Long-term care operating performance of $6 million was well below our expectations. As important to note the 2Q ’14 LTC operating earnings were helped by $47 million of additional premiums and reduced benefits from the approved in-force rate actions on our Pre PCS, PCS 1, PCS 2 and Choice 1 policies.
Now let’s take a deeper look at our second quarter LTC insurance performance. We are seeing significantly higher incurred losses on our older blocks business. Slide 27 shows the number of policies, average attained age and percentage of lifetime benefits on our LTC blocks.
The higher losses from claims in the second quarter 2014 were primarily from higher severity on both new and existing claims, reflecting a more expensive mix than the prior quarter.
In the quarter, claims paid exceeded claim reserve releases, which significantly reduced earnings. This significant adverse experience, although, limited is concerning as it could indicate a change in trend not reflected in our claim reserves.
Given the strategic importance of this business and our desire to ensure we develop the best possible estimate of ultimate claim costs, we are conducting a detailed review of the associated claim reserve assumptions, methodology and process to determine what changes are needed and we do not currently know whether or not these changes will have a material impact on reserves. We expect to complete this review by the end of the third quarter. However, given the complexity of the business, our review could take longer.
As a reminder, there are two primary reserves established to cover LTC policy benefits. One is the claim reserve, which primarily is made up of the disabled life reserve for DLR. That reserve is a best estimate met to cover a current inventory claims and is reviewed periodically as experienced once.
U.S. GAAP claim reserve was $3.5 billion as of June 30, 2014. The other is the active life reserve which focuses more on future claim funding and generally is locked in at a time of policies issued. The U.S. GAAP active life insurer was $15 million as of June 30, 2014.
As you know, adverse experience from our oldest book to business was the catalyst for the large rate actions we are requesting in order to bring our oldest business close to breakeven. As received, the incremental premium for the rate actions helps to offset adverse experience.
Currently, reserving rules do not allow us to consider when establishing the act of life reserve, the incremental premium that we have both implemented and continue to see. Under U.S. GAAP unless the underlying margins become negative, demonstrating inadequate reserve levels, we cannot reflect the incremental premium for the rate actions in our active of life reserve.
We indicated in our December 4th LTC call, based on our margin review as of September 30, 2013, that we had significant positive margins even in certain stress scenario. The margins reflected the future economic value of the anticipated $250 million to $300 million of annual premium increases not to address adverse experience and had an NPV of $2.5 billion based on assumptions used in the analysis. This value, which resides in our balance sheet margins will be realized over time.
The point here is that the accounting rule served to create some mismatches. First, what is reflecting the margin versus reverse and second, accounting mismatch between when the economic benefits of the rate actions are realized and how LTC results are reported in the financial statements.
With respect to the rate actions, we know that the original premiums on the Pre PCS, PCS 1 and 2, and shows one block have proven to be inadequate and we are seeking large premium rate increases to bring the Pre PCS, PCS 1 and 2 blocks closer to breakeven and to improve the profitability of the Choice 1 business.
During the second quarter 2014, two additional states approved rate increases, bringing the total number of state approval to 43. The total gross annual premium approvals are now $330 million and as we said last quarter, we adjust this number to get to our best estimate of the net incremental premium.
After some refinement to the net premium projection this quarter, our slightly revised estimate of the net annual premium increase from the 43 state approvals as of June 30, 2014 is $190 million to $200 million when fully implemented by 2017.
We continue to work with the state that have not yet approved the increase and plan to re-file in states where we didn’t receive full approval. We still project that the ultimate annual net premium increase in this blocks when fully implemented by 2017 will be between $250 million and $300 million.
As we've previously disclosed, margin levels are our key metric and we expect to complete our 2014 annual U.S. GAAP margin analysis during the fourth quarter of 2014 as we have done in the past. Additionally, our 2014 cash flow testing results will be reflected in our year end statutory financials.
Now let me provide an update on our LTC strategy. Despite the challenges we continue to face on some of our in-force blocks of business. I remain convinced that Genworth can change the future business model and regulatory framework for our LTC insurance business in a way that will allow us to take advantage of the strong consumer need for LTC risk mitigation with attractive future growth, profitability and ROE.
I believe we are making significant progress in the three key elements of our LTC strategy. We continue to make progress on convincing state insurance regulators along with other state and federal government leaders that is in the interest of consumers, the states, all tax payers and insurers to create a robust private market for long-term care insurance.
There are 150 million Americans between the ages of 40 and 75, including 78 million baby boomers between the ages of 50 and 68, but only 7.4 million Americans of all ages are covered by LTC insurance.
Since most baby boomers have saved significantly less than $100,000 in retirement plan, 70% of Americans reaching the age of 65 will need LTC services and 10,000 Americans are turning 65 every day between now and 2030. It is in the interest of all stakeholders to significantly increase the number of Americans who are covered by private LTC insurance.
To that end, we launch our Privileged Choice FlexFit LTC insurance product in July. This is a big deal. As part of this innovative product launch, we are offering industry-leading FlexFit packages that are simpler for consumers to understand, while allowing them to pay as little as $80 to $90 per month for reasonable amount of coverage.
Consumers will have the option of choosing between several FlexFit premium or FlexFit coverage packages. We expect to see higher sales of LTC policies in the future as we begin marketing our new PC FlexFit product, as well as bring other new LTC products to market.
Next up on the new product front is a broader array of hybrid (indiscernible) life and annuity product with LTC drivers. Our current hybrid offering, PLC or total living coverage is selling well with gross deposits not premium equivalent of $42 million in the second quarter ‘14 versus $25 million in second ‘13, an increase of approximately 70%. We expect to see PLC sales continue to increase in the second half of 2014.
I noted earlier that we continue to make progress on the large premium rate increases on Pre PCS, PCS 1, PCS 2 and Choice 1 block. We are up to 43 states approved and are in discussions with the remaining states. We are also starting the process of going back to the states where we didn’t receive the full increase.
Slide 13 in the presentation provides an update of the projected additional our new premiums from these sources. Although, remaining states yet to approve, there are six, where we believe we have nearly exhausted all reasonable avenues that will allow us to effectively manage our business there, while we have continued to work with these states to obtain the necessary approvals, we are evaluating all options up to an including the suspension of sales in these states.
We are also convincing more state insurance regulators that our new approach of smaller and more manageable rate increases sooner in the lifecycle of an LTC policy make sense. During 2Q ‘14 seven more states approved their Choice 2 rate increase request, bringing the total number of state approvals to 18.
Slide 27 shows in-force premium, attained age, number policies and percentage of lifetime benefits and other statistics on our Choice 2 block. The gross approve rate increases in these 18 states range from 10% to 13% of current premium.
So while we continued to be challenged by several of our in-force LTC block, we remained confident that Genworth will be a leader in a more attractive LTC insurance market in the future.
Now I will turn the call over to Marty to cover 2Q ‘14 results in more detail.
Thank you, Tom, and good morning, everyone. I’ll cover two topics today. First, I'll give an overview of results for the quarter and second, I’ll give an update on our 2014 goals. Let's begin with second quarter results, starting with slide three and four of the earnings summary.
We reported net operating income of $158 million for the quarter and net income of $176 million. With the completion of the IPO, a portion of the earnings in Australia are now accounted for in non-controlling interests. For the quarter, the non-controlling interest in Australia was $11 million and only related to earnings since May 21st this year.
Adjusting for that, net operating income was up 27% versus the prior year but down 13% from the prior quarter, largely result of adverse claims experience in long-term care, partially offset by continued strong loss performance in our mortgage insurance platforms in Australia, Canada and U.S. The results also reflect $11 million of unfavorable foreign exchange versus the prior year.
Turning to slide five, Global Mortgage Insurance, reported net operating income was $136 million, up 11% versus the prior quarter, when adjusting for the IPO impact. Let’s cover Canada first where operating earnings were $47 million for the quarter.
Moving to slide six, unemployment in Canada at quarter end was 7.1%, a slight increase from the level at the end of the first quarter. There was a modest sequential increase in home prices. Premiums were down sequentially from the maturing of the larger 2007 and 2008 books of business and unfavorable foreign exchange.
Flow NIW in the quarter increased 72% sequentially, with the normal seasonal variation we see in the second quarter of each year, combined with the strongly rebound from the first quarter that was impacted by the more severe winter weather.
Bulk NIW which is lender dependent and varies from quarter-to-quarter was up versus the prior quarter. We continue to expect Flow NIW to be flat to modestly higher in 2013 for Canada.
The loss ratio decreased 8 points from the prior quarter to 12%, the lowest level since 2006. Given the strong performances of the business so far this year and the stable economic environment, we now expect the 2014 full year loss ratio to be between 15% and 25%.
Turning to Australia, operating earnings were $57 million, up $6 million versus the prior quarter when adjusting for the IPO executed in the second quarter. Turning to slide seven, unemployment in the country was 6%, up from 5.8% in April of 2014 and overall home prices moderated in the quarter.
Taxes were more favorable in the quarter. However, foreign exchange is unfavorable versus the prior year. The tax favorability was related to the IPO and included a $4 million increase in expected quarterly tax benefits and a $5 million favorable adjustment to catch-up year-to-date taxes. We still expect 2014 full year tax rate in Australia to be approximate between 20% and 25%.
Excluding the impact of foreign exchange, premiums up from the prior year, as the larger more recent books mature and more premium is recognized. Flow NIW was down 3% sequentially. NIW is still expected to be flat while modestly lower compared to 2013.
The loss ratio remained low at 23%, although, up 6 points from the prior quarter from seasonally higher new delinquencies and lower cures. We’re now anticipated the loss ratio for 2014 will be between 25% and 30%.
In Australia, we expect operating earnings before adjusting for minority interest to be in line with 2013 levels, a semi stable foreign exchange rates. After adjusting for minority interest, earnings are expected to be lower compared to 2015.
Moving to U.S. MI, net operating income was $39 million for the quarter. As shown on slide eight, NIW rebounded from the severe winter weather that impacted the first quarter home sales and was up 56% to $6.1 billion.
Given that the 2014 mortgage insurance market is now estimated to be approximately 15% lower than last year, we have reduced our expectation of NIW in 2014 to be in line with 2013 as the decline in origination was offset by higher MI penetration and market share.
New flow delinquencies dropped 18% year-over-year in line with our 2014 expectations and total flow delinquencies fell by 26%. Loss development within the quarter was in line with the modest loss reserve strengthening completed in the first quarter of 2014.
Loss mitigation savings for the first half of 2014 were $216 million and we continue to expect full year savings to be between $250 million and $350 million. The new better performing books from 2009 forward are now 50% risk-in-force. We expect this percentage to continue to increase throughout the year for the higher end of our 2014 year end goal of 50% to 55%.
Turning to capital in the division on slide nine, to prescribe capital amount or PCA ratio in Australia was estimated at 154%, up from the prior quarter from continued strong statutory income. For Canada, the minimum capital test or MCT ratio was estimated at 230%.
After consultations with this regulator, the business established an interim target at 220% MCT, up from our internal target of in excess of 190%. We will review the target again, pending the development of a new regulatory capital test for mortgage insurance.
While this interim target is higher than our previous management target, it adds clarity to the level of regulatory capital, which is below our current levels. The business continues to evaluate opportunities to optimize capital in light of this new target.
U.S. MI at quarter end, risk-to-capital ratio for GMICO was approximately 14.0:1. The 4 points decrease this quarter was from positive statutory earnings, as well as a $300 million contribution in cash that was being held at MI holding company from the December 2013 Dutch transition as a first step in addressing the Draft Private Mortgage Insurer Eligibility requirements.
Turning to the U.S. Life Insurance Division on slide 10, operating earnings were $69 million, down $25 million from the first quarter driven by the adverse claims experience in long-term care.
Operating earnings in life Insurance were $39 million for the quarter. Mortality expense has improved versus the prior quarter and generally in line with our expectations, while versus the prior year mortality was modestly improved.
Long-term care earnings fell to $6 million. The in-force rate action continues to impact earnings benefiting results by $47 million, $34 million higher than the last year and $3 million higher than the prior quarter.
Moving to slide 12, the reported loss ratio for the current quarter was approximately 73%, up 10 points from the prior quarter. Results in the quarter were significantly worse than excepted largely because of higher incurred losses.
This quarter we saw poor experience to higher severity on new claims, while at the same time, we also had worst severity on existing claims, although, the causes for the higher severity are different.
I should also note that this poor experience on existing claims is coming primarily from the older generation of policies on which we have enacted the significant rate actions, which Tom discussed earlier.
Before, I provide more perspective on the new and existing claims, let me first remind people about claim reserves or what the industry commonly calls disabled life reserves or the DLR and how they work.
Upon receipt of a valid claim, we set up a corresponding claim reserves or DLR to represent our best estimate of the present value of what we expect to payout on that claim over time.
There are many assumptions to go into that best estimate reserve, including the expected linked of time payments will be made and how much of the available benefit will be used.
The reserve estimate is a function of several factors, including the policies daily benefit amount, the benefit period, such as whether or not the policy has a life time benefit, diagnosis of the claim, for example, dementia or physical issues such as stroke and sight of the claim, that is, whether the treatment is at home, in assisted living facility or in a nursing home.
Existing claims or DLR has already been established, reporting periods earnings will depend on the actual payments made on those claims, as well as by the change in the corresponding claim reserves.
Earnings in the period are impacted at the actual experience in the quarter is different than what was assumed in the DLR. For example, if there were fewer recoveries or guess been assumed, the paid claims will exceed the associated claim reserve release.
Of course, given the complexity and number of factors impacting actual claims, we expect that in any given quarter there will be gain or loss from the difference between actual paid claims and change in DLR.
With that backdrop, now let me discuss what happen to new claims in the quarter. The number of new claims received in the second quarter of 2014 was actually slightly lower than the prior quarter, down approximately 3%.
The frequency of claims is not the issue. Rather it was the severity of new claims which is higher. As we had higher average claim reserves, which were about 3% or 4% higher on new active claims than we had in the prior quarter.
In this quarter we had a shift in the mix of claims for which there were higher assumed payments, which was reflected in a higher average claim reserves that was set up conversely impacting earnings versus the prior quarter.
In particular, we saw a shift in the mix of claims from the prior quarter deposits were the higher daily benefit amount, as well as the higher mix of lifetime benefits claims, which are expected to be paid for longer period of time. The total earnings impact in the second quarter versus the prior quarter from new claims is approximately $12 million after-tax.
Now let’s discuss existing claims where severity was also adverse this quarter. In the first quarter, our experience relative to our Disabled Life Reserve assumptions was favorable, resulting in a favorable impact of approximately $5 million. While in the second quarter, our experience is unfavorable, resulting in an unfavorable impact of approximately $24 million or $29 million difference between the quarters or about $19 million after-tax.
In other words, Disabled Life Reserve releases on claims were more than sufficient to offset paid claims in the first quarter. But in the second quarter, paid claims significantly exceeded the associated DLR release. The largest driver of the difference between quarters that fewer claims were closed or terminated during the second quarter, down approximately 5% compared to first quarter, which contributed to higher paid claims during the quarter and a higher ending claim reserves than anticipated.
When comparing to the prior year, both increased severity and higher frequency on new and existing claims drove the increased incurred losses. New claims counts received in the quarter were up 8% versus the prior year. The average claim reserve for both new and existing claims also increased versus the prior year.
As Tom mentioned, given the second quarter results, as well as our annual review process, we have started the deep review of the long-term care Disabled Life Reserves and intend to complete it by the end of the third quarter. We less performed an in-depth DLR review in the third quarter 2012 and strengthened components of the claim reserve at that time.
Although there were minimal net impact to our earnings as we also released another claim reserve component that was redundant. Our last annual review in the third quarter 2013 did not indicate the need for any strengthening at that time.
Moving to the 2012 rate actions, we saw an incremental $32 million of premium in the second quarter and now anticipate that after-tax earnings for 2014 should benefit by $150 million to $175 million from the rate actions higher than our initial forecast. However, we now expect the incremental premium that will be recognized in 2014 will be between $120 million and $140 million pretax lower than our initial forecast given the timing of approvals and a further refinement of the projection model.
For fixed annuities on Slide 14, earnings were $24 million. Mortality was unfavorable to the both the prior quarter and the prior year.
Turning to review of statutory results on Slide 15, unassigned surplus for the second quarter was up from the prior quarter at approximately $560 million. The unassigned surplus growth came primarily from a reinsurance transaction we completed in the quarter on our term insurance block as well as from operating income in the businesses.
Reported statutory income from U.S. life companies was up from the prior quarter and included benefits from the restructured life insurance transactions, and intercompany dividends. Excluding the life insurance transactions, intercompany dividends, pretax statutory income was approximately $80 million in the quarter. The risk-based capital ratio for the quarter in U.S. life companies is estimated to be approximately 490%.
Shifting to the corporate and other division on Slide 16, the net operating loss for the quarter was $47 million. International protection earnings were $2 million for the quarter, reported net written premiums in the first half of the year are up compared to the same period last year as the business is beginning to see some relief and the topline pressure has been experiencing given the challenging environment in much of Europe.
Also during the quarter, S&P affirmed the financial rating of the business at A minus, revising the outlook on the rating to stable from negative. The runoff earnings were $15 million in the quarter as equity market growth was modestly higher than the prior quarter.
Shifting to investments on Slide 17, the global portfolio core yield was up slightly from the prior quarter at 4.45%. And we continue to experience a very low level of impairments.
Let me now cover some topics of the holding company on Slide 18. We continue to generate and maintain significant liquidity, with cash and liquid assets of approximately $1.2 billion at the holding company, representing a buffer of approximately $800 million in excess of 1.5 times debt service and well above our $350 million target buffer over that level.
Cash levels benefited from our successful execution of the Australian MRI IPO with net proceeds paid to the holding company of approximately $500 million in the quarter. But we’re also impacted as we paid off the $485 million 2014 debt maturity. Our leverage ratio has now declined over two points to 23.9% in line with our year-end expectation of 24%.
Important priorities for us for the IPO proceeds remain insuring our operating businesses are appropriately capitalized and seeking opportunities to accelerate progress on our medium-term leverage targets. As Tom mentioned, USMI is currently focused on reinsurance alternatives in large part to meet the GSE requirements.
We will determine the use of IPO proceeds after we assess the final GSE requirements and alternatives to comply with them, as well as evaluate U.S. life performance particularly long-term care results.
I now like to provide an update on our goals and earnings drivers for 2014. In U.S. life insurance division, our expectation in February was that the division earnings would increase 5% to 10% over 2013, largely driven by improvement in long-term care from the rate actions.
However, given incurred loss results in the quarter, it is likely that 2014 earnings for the division will be lower than net expectation. Our views on 2014 earnings for life insurance remain unchanged from those we laid out back in February while fixed annuity results this year are now viewed to be somewhat better than expected in line with overall 2013 levels given strong investment performance.
Long-term care experience in the quarter was well below expectations. We will walk through results closely in the third quarter to see if there are any underlying trends or if the second quarter results are merely an aberration. In addition, results could be impacted by the long-term care Disabled Life Reserve review.
If long-term care experience remains adverse, our unassigned surplus target could be impacted. Given our desire to maintain healthy capital levels and with approximately $500 million of Australian IPO proceeds at the holding company, we currently expect to reduce 2014 U.S. life dividends below the target. Perhaps significantly if needed, even with strong dividend capacity in order to support healthy level of unassigned surplus and RBC ratios.
As a reminder, our capital plans did not assume the execution of the IPO. But now that it is executed, the proceeds give us enhanced flexibility. With the upcoming long-term care DLR review, the repatriation of the long-term care business in our Bermuda-based captive Black, likely we will move to 2015, given the time required for regulatory approval after we update our filings during the fourth quarter to reflect any potential changes to the Disabled Life Reserves in the third quarter.
Let’s move now to the Global Mortgage Insurance Division. After adjusting for earnings attributable to the minority shareholders, we currently expect our reported operating earnings for the division to be flat to up modestly, reflecting strong loss performance and lower effective tax rates and assuming stable foreign exchange rates.
Dividends for the international MI segments in 2014 are expected to be between $70 million and $110 million, reflecting the impact of the IPO and would be in addition to the proceeds received from the Australia IPO. Finally our expectations for businesses and our corporate and other divisions have not changed.
Let me wrap up. We continue to make good headway in executing our strategy and taking actions to improve our business performance. Although the incurred loss experience and long-term care this quarter was very disappointing. As we moved through the second half of the year, we have much work ahead of us to deliver on our strategic priority and continue to rebuild shareholder value.
With that, let's open it up for your questions.
(Operator Instructions) We take our first question from Sean Dargan of Macquarie.
Sean Dargan - Macquarie
Thanks and good morning. I don’t know if Tom or Marty wants to answer this but I’m wondering if you could help us think about how to size a potential reserve strengthening because you did say that a change in assumption is likely as a result of this review. I mean, what should we be looking at?
You know, Sean, there is a complex answer to that question. And so I think probably a place to start would be the -- if everybody could focus on Slide 27 in the presentation because I think they are very important.
And so if you look at, we divided there the old block which is pre-PCS, PCS 1 and PCS 2 and there are 331,000 lives in force. So those are the policies that we know we have issues with and that's where the bulk of $250 million to $300 million of additional premiums is coming in.
And then on the new block, we have choice one. So that block that the oldest of the new block and there are 316,000 lives covered there. So between the old block in Choice one together, that’s a little over 50% of our lives in force. And so those are the challenge and then on the new block, it’s about 570,000 policies. And you can see on that slide there, the average obtained age on the old blocks, So Pre-PCS is 85, PCS 1 is 82 and PCS 2 is 76.
So that’s -- just given their ages, that’s where we’re seeing issues. And of course, if you look at the percentage of lift-time benefit, it’s also much higher than say the newer blocks where it’s very low and now we don’t offer that. On the other hand, there is a confusion I think on the part of some and maybe hits our fall, between what we did in December and what we’re seeing now.
So if you go back to the December 4th review, there we’re looking at the overall margins. And we did that because many investors and analysts were concerned because other companies had taken reserve additions primarily around different views or assumptions that they had on the active life reserves.
So when you look at December 4th and you talk about the overall number of policies that we have, it’s about 1.2 million individual policies, then we have group policies on top of that but it’s relatively small. And so what we did in that margin review and looking at all the policies, including those on claim.
The basis was economic and then you have to adjust for the U.S. GAAP and U.S. STAT accounting rules when we do our actual GAAP margin and that cash flow testing. But remember the margin is very different than just a reserve. The margin is the net present value of the cash flows from all sources. So that would be reserves plus current and future premium plus investment income, less the projected claims and expenses going forward.
And so as we said in December, when we look at all of that the economic margin was $1.6 billion on the SAP basis and $4 billion on a GAAP basis. And then when you do the margin testing, it’s less than that. But the other thing that’s very important to remember is that there are two key drivers for a big part of that margin and which we also explained in December which is those $2.5 billion of net present value in the margin from incremental premium that we’re seeking.
So those are these large premium where we’re expecting $250 million -- $300 million at this point, we’re at $190 million to $200 million. In addition to that, $2.5 billion as $1.5 billion or maybe a little more, realized gains from the terminated interest rate swaps. So a big driver for that economic margin were those two things.
When you look at the claim reserve and that’s we’re talking about here, not the overall margin, not all the policies but claim reserve, there are 50,000 people on claim. That you look at 50,000 compared to 1.2 million overall individual policies that’s about 4% of the policies are on claim. And there the accounting rule is, it has to be your best estimate. There could be no margin in that.
It’s your best estimate of the net present value of the claims. So on those 50,000 claims and those turnover because the average claim is only three or four years and I think they have new people on claim. So we’re talking about what we may decide to do in terms of assumption changes on 50,000 claim.
And if you look at in the December 4th presentation, it was based on what we saw as of the 930 2013 and if you look at the claim reserve in the first half of ‘13, in fact we had higher than normal claim terminations basically best. So when we did our December 4th review, the claim reserve or the DLR looked okay. And most of the focus was on no the overall broader margins and now what we’re seeing and of course, we’re seeing this in three months, April, May and June.
But they were much higher and much higher and it -- what we can figure out is, is that a trend, is that just three months and things will go back. If we compare it to last year’s first half, we would say it’s much more severe than that. So that's really what we're doing in this review that we're going to do in the third quarter.
So we will do our normal margin thing as we said. The GAAP margin and the fourth quarter and STAT cash flow testing when we filed the statutory statement. But we are looking at third quarter as the DLR claim reserve which is $3.5 billion of the total reserves. I think DLR is $15 billion and there is some other reserve.
So what I can say, we don’t know because we got to analyze whether the basically three months of data is significant, we just don’t know that. And that’s what we’re looking at but just to put it on perspective that could be actual existing claims and not the overall book of business. I hope that helps Sean and the last thing I’d say this is very complex. It is the primary reason why I’m pushing so hard with the stage that you can’t predict this stuff.
You are going to see changes in severity. And one of the issues we’re seeing more is assisted living claims versus nursing home claims which we saw in the past and the really old policies are only nursing home policies. So, it’s complex. And I think that we can't tell you what the ultimate result of this until we really spend the time. We will have some of the best outside experts helping us figure out these higher claims in those three months. Is that a trend? Is the new trend or not? And all of that, as Marty said, will be factored into whether or not we decide to make any changes in our assumptions for the claim reserve. And as I said last year, when we're doing the overall margin review, we decided we didn’t have to make any changes in the claim reserve because in fact the first half of the year the claims were lower because of higher terminations.
Hey, Sean, it’s Marty. I would just add a couple things. One is, since the reserve review and some strengthening we did in the third quarter of 2012, what we saw throughout 2013 and actually in the first quarter is that generally the DLR has been appropriately funding paid claims and existing claims. So, this is the first quarter where we’ve seen such a significant kind of loss on that. As I mentioned in my remarks, we saw loss of about $24 million this quarter pretax. That's by far the largest loss in general for all of last year quarter by quarter. If you add it up, that was the slightly positive number and it was the slightly positive number in the first quarter. This is the first quarter, we've seen such a lofty times point in the last three months.
The other thing I would mention, you might find it helpful. While as Tom said we don't really know as we look at these assumptions to make changes what impact depending on the reserves, it will be on the reserves. Let’s say there is kind of a helpful rule of thumb as you are thinking about potential impacts on the statutory entities, U.S. life companies. Think about a pretax DLR increase. Let’s say for every dollar of DLR increase, if it increases, roughly a third of that dollar, say $0.33 would actually impact unassigned surplus. So, a couple reasons behind that. You recall that half the business is reinsured into BLAIC, the Bermuda subsidiary. So only half of that is the U.S. statutory entity.
And then another tax benefits, let’s call it, generally 35% up to some amount that we had. So basically one-third roughly is the rule of thumb of every dollar of DLR impact hit unassigned surplus. So it would be I think a fairly modest impact on percentage basis on unassigned surplus.
Sean Dargan - Macquarie
Okay, thank you. If I could just ask one quick follow-up and I will let this get on. The process in which you come to your best estimate of NPV of claims, is that the same for GAAP and stat reserves? So in other words, we won’t have a scenario where you can add to GAAP reserves without having to add cash to stat reserves?
Basically, Sean, the only difference between what we would have to do for the best estimate for the claim reserve for GAAP and stat is there is a different discount rate between the two. But remember this on average is a three or four-year claim. So the NPV, there will be some difference, but it’s not all that significant. So to the extent that we change anything, we would change it both for GAAP and stat, maybe a little bit different because of the different interest rate assumptions for the discounting.
Sean Dargan - Macquarie
Okay, thank you.
And we will take our next question from Nigel Dally with Morgan Stanley.
Nigel Dally - Morgan Stanley
Great, thanks. Just going back to Sean’s question, perhaps from a little different angle. I appreciate the complexity of it all, but in the past you provided sensitivities to different factors. And so you’ve got this $3.5 billion of (indiscernible) severity was 10% worth into perpetuity, plus you come up with the numbers what that would meant for the (indiscernible)?
Nigel, you just can’t do it that way. There is so many different factors that you look at. And so I just don't want to get into speculating, because we really need to do the work to see based on the second quarter, do we need to change the assumptions? So now the other thing that you know the last -- we and most of the companies probably every three or four years do -- regardless of what’s happening to the claims do a deep dive into the claim reserves. And so, as Marty said, the last time we did that was in 2012. And so that would have reflected all of our experience the history till the year before say.
Since then we have whatever that is, the two more years, two and half more years of claims status. So we will look all that again. And so there will be, let’s call it, two years plus of new claim data to look at. And then, we also will consider you know what to make of April, May and June and the one what we may need to do in terms of our assumptions on the claim reserve. Again, it comes back to the requirements are that we book our best estimate.
So what -- where we are in the claim reserve in the second quarter is our best estimate, but we do want to review all the assumptions given what we saw in April, May and June because it was unexpected. But to get into speculating of what that could mean, I mean, I just think we just don't want to do that because we just don't know we have to do this fulsome review. We will have inside and outside actuaries looking at all of that.
And so because there are so many different drivers, you have females and males, females aren't claim longer than males, 85-year-old versus 65-year-old unclaimed, whether it's dementia related or not dementia related, whether on assisted-living facility or nursing home. There are so many variables that you have to look at. There is transitions now, people generally start unclaimed in home care, then they go to assisted-living and then it’s usually the last case nursing home.
The nursing home costs are doubled assisted living costs. So there is just so many complexities that you know to try to get into what the three-months and the change based on claims since we did the last study. There are just too many things to factor in for us to really be able to give you any guidance yet. We obviously will do a full look and we will see whether we need to change the assumptions. And if we do, that may or may not have a material impact on our best estimate for the claims. And the guy come back to, we’re only talking about 4% of the total policies, 50,000 versus the 1.2.
Nigel Dally - Morgan Stanley
Right. Understood. Just another follow-up on long-term care as well. You mentioned the six states where (indiscernible). Can you give us an indication as to how large those states are, perhaps what percentage of your total premium comes from those states?
Yeah. I think that what we received today, it represents about 70% of the overall premiums, the remaining states are some large, some small. The six states include some in the New England state, so some of them are small. And then of course we’re going back to 30 or more states where they didn’t give us the full rate increase to ask for more.
And the other thing I would say again because you know I am sure we may get this question is, we are not necessarily done on the rating, premium rate increases on those old books. What we have agreed is on the states that gave us the full increase and that's -- of the 43 states, that’s less than half of the states. So I think it was the full increase.
In general, we are agreeing not to -- these are increases well above 50%. We’ve agreed not to ask for rate increase until five years from now. But on the other states where they didn’t give us the full rate increase, we are going back. We’re also going back with April, May and June claims statistics. So we are for those going back and factoring that in and talking to the regulators, clearly I think this is one more hopefully good argument for them that they do need to give us the increase because you know we maybe seeing claims.
And again going back to slide 27 on these pre PCS, PCS I and II, part of the problem is that at least on the two oldest blocks, the average age is 85 for pre PCS and 82 for PCS I, and so those are clear and there is a lot higher percentage of lifetime. Now we don't offer that on Flex II or the new Flex III product, but in the past we did.
Nigel Dally - Morgan Stanley
All right. Thank you.
Nigel, it’s Marty. Just want to back for just a second on the DLR reviews. On the 2012 review we did that was really based on experience that we had up through about 2010. We’ve got credible experience going back probably back to 1994, at this point about 20 years of experience. We’ve looked at it again in 2013, didn't see any need for any changes at that time. In fact, the DLR was actually probably behaving over sufficiently the first couple of quarters after that. So now as we do the review, now we will be looking at really experience since 1994, really all the way up through what we’ve seen in the second quarter. So it will really be taking on additional experience from the 2012 review of say the experience we’ve seen additionally from 2010 all the way through where we're this year.
Nigel Dally - Morgan Stanley
We will take our next question from Suneet Kamath from UBS.
Suneet Kamath - UBS
Thanks. Good morning. The couple more on long-term care. First, Marty, on your rule of thumb around that one-third hitting unassigned surplus. Will that change once you bring BLAIC onshore or combine it? I mean, you said you’re getting a benefit because some of it’s reinsured to BLAIC, but once you bring it onshore, does it really matter then?
Well, again, the repatriation which is still a priority of ours, it’s going to really get -- looks like it will be postponed to 2015 for the reasons that we’re doing this DLR update and it doesn’t impact the reserves. We have to update our pro forma filings. So by time we do that, it will be the fourth quarter so kick into 2015. But if we do -- if we make any changes in the third quarter with the DLR review, which is our intent, that will impact where we are at the end of the third quarter and half the business is down in BLAIC. And so the unassigned surplus impact overall through that period of time.
Later on when we recaptured the business and repatriate the business from BLAIC, the unassigned surplus impacts have already happened, so it will be not -- it won’t be an additional hit, it will be actually a benefit in bringing the business.
Suneet Kamath - UBS
Okay. And then I guess just to think about that, again the one-third, just to make sure I understand this correctly. So let’s just say that the reserve requirement increase is a $100 million. That effectively is what you are saying that you would only have to put 33. If you wanted to fund that increase with new capital from the holding company, whatever, are you basically saying that if there was $100 million you only have to put in $33 million?
What it means is first of all it’s all hypothetical. We don’t really know what the number is going to be. But if it were say $100 million of DLR increase that means that the unassigned surplus impact would be around $33 million. So where we are now is $560 million of unassigned surplus that would go to call it 530, 527 technically. So please find that helpful.
The other thing is that another rule of thumb to give you is the impact on RBC points. So $100 million DLR impact, gross pre-tax DLR impact would be probably after-tax $70 million, that’s maybe 8 or 9 points of RBC impact roughly.
Suneet Kamath - UBS
Right. But should we be thinking -- since you are guiding us to unassigned surplus in RBC, should we be thinking about those as the -- I mean those are the metrics that we should be thinking about in terms of what you want to protect?
Yeah, I think that’s right. I think that what we want to make sure our U.S. life business is very well capitalized and also makes sure that maintains very high dividend capacity. The dividend capacity in U.S. life right now is about $350 million and that’s the function of capital levels and stat earnings and constraints by unassigned surplus. So we certainly like to keep unassigned surplus in RBC ratios at lofty levels and that’s our priority.
Suneet Kamath - UBS
Okay, got it. And then just I guess for Tom, just based on my conversations with folks yesterday, I will ask the question this way. Why should we not interpret Jim Boyle’s decision to leave as sort of a indication or sign that maybe this long-term care turnaround is going to take a lot longer and in fact they use only there for six months. And I think when you hired him, you touted his experience in long-term care as one of the reasons. So I just don’t know how you want to respond to that, but I think a lot of us on the call would like to hear the response.
Yeah, I would say certainly Jim did have a lot of experience and good executive. He was a good addition to our team and I work closely with him. As our press release and then the Health Fleet press release states, I mean he resigned and he’s taken on the role of Chairman there. So, I mean, I don’t know what more to say on it.
Suneet Kamath - UBS
All right. Last one is just your longer-term ROE guidance at 7% to 9% by 2016 and obviously that was pre-Australia and obviously before you knew what you know now about long-term care. So how should we think about that 7% to 9% based on what we know today and what’s happened?
Yeah, I think what you all seemed to be missing is a very big point. This is a issue around our claim reserve. We also are seeing higher premiums every quarter. We ultimately think we are going to get to a point of $250 million to $300 million of incremental premiums by 2017 and that will go forward. And so yes, whatever reserve action if any that we have to take this quarter and the future, one of the challenges I think for analysts and investors to understand is because of the way U.S. stat and GAAP works, those premium increases or any reserve releases, and you are seeing it in that one slide, slide 13 that falls to the bottom line.
And so part of our projection of the 7% to 9% increase in the ROE certainly improvement in GMI and we are seeing that and USMI in particular will be a big driver of that. But also those premium increases. Again our point estimate is $280 million a year going forward and we will be building towards that through 2017 and that’s going to add significant incremental benefit to the returns of the business. We've always said, I've always said that on the old blocks, so again going to page 27, pre PCS, PCS I, PCS II, those blocks we under price them. We are now thinking very high premium increases on those. That doesn't mean we can't even get more premiums down the road.
And so look, the way I look and I think, I’ve been clear but let me state it again. We know we have issues on those three blocks in particular. We’re losing money, a significant amount of money and these premium increases are trying to get those back to breakeven and that also will help for the fact that on those given the average issue age, we will see higher claims over the long run on those blocks from where we are today.
So I still remain very confident of the long-term care three-part strategy. We launched the new product, Flex III. I think the FlexFit packages will allow us to grow premiums. We are getting 18 states now. They don’t have to give us the choice to approvals, because right now the actual losses are well below 10% and from of a loss ratio perspective. But I think, we’re convincing more and more states that it is much better. This is complex business.
You can't project interest rates, lapse persistency and morbidity, and another evidence of that and what we've seen in the second quarter. And so I do think going forward, why I’m confident the new model for long-term care is because I do think we’re going to get states to allow us to re-rate based on experience and that’s the only way you could really be in this business if that regulatory framework changes.
We still have, you calls us on cost, we have 331,000 of these old policies and we know we have to deal them, but that’s the biggest reason that we’re seeking the large rate increases. So in terms of the 2015 return, I think we said 12% to 13% for the GMI and I think we still believe that's right and I still believe 7% to 9% in the life companies and then overall 7% to 9%.
Suneet Kamath - UBS
We’ll take our next question from Geoffrey Dunn, Dowling & Partners.
Geoffrey Dunn - Dowling & Partners
Thank you. Good morning. I had a couple of question on your commentary about the growth PMIERS. First, I think you indicated that as written that the pro forma returns be in line with your expectations. Is that commentary including leverage from reinsurance or without?
Geoff, it’s Kevin. We think it doesn’t include it right now. I mean, we’re pricing this business, all of our new business, given the credit characteristics of that business really on a risk adjusted basis now from a capital standpoint. It's about in the same range as where the PMIERS falls our right now. So it does not include the benefit we get or the inclusion of whatever leverage associated with reinsurance.
Geoffrey Dunn - Dowling & Partners
Okay. And then in terms of that same commentary, is that based on the current scope of the business or do you think the returns in the sub 700 FICO world would also be as expected as currently priced?
Yeah. A good point. I think as Tom or Marty mentioned, in aggregate, we think the returns are fine. In our opinion, there is probably some capital inefficiencies around the edges embedded in some of the current drafting of the guidelines. They really have the greatest impact on lower credit borrowers, so a little maybe lower FICOs, higher LTVs. So on the edges there we may -- there may need to be some refinement, but in aggregate, based upon what we’re writing today and what we’d expect to write going forward, we think the returns would meet our return expectations.
Geoffrey Dunn - Dowling & Partners
Okay. And then last question. What is the benefit of being compliance by mid ’15, rather than taking the two-year grace period? Is it really that much of a competitive factor?
This is Tom. What I would say on that is we think USMI, given our position in the market, given the returns we’re seeing on new business, so incremental returns on new capital put to work, as well as the fact that over time, I mean, we’ll see where all the politics come out that we could have a larger private mortgage insurance market in the U.S. because Fannie Mae, Freddie Mac and probably may pullback. So there is more opportunities we think given all those factors.
USMI is one of our best businesses, I said that. And therefore, we do think it's a competitive advantage and also would be better in terms of our relationship with our bank customers that we’re compliant sooner rather than later. And so our goal would be as I said in my remarks to be of compliant on June 30, 2015 or before.
We think that we can do that. We hope that we can do that mostly through reinsurance and we’ll see where that ends up, and then obviously we have some excess cash at the holding company. So it's becoming I think a better and better business everyday. We are at 50% of the risk is the new block that will continue to go forward, so it is one of our best businesses.
And what we said in terms of the lot of reasons we did the Australia IPO to reduce the risk, to also rebalance the capital, but it also allows us to rebalance the capital in a way that if we do need, we know -- we knew where we needed to do some increase in capital, given where we thought the GSEs will come out. I think they came out a little bit more stringent than we thought.
Overall, we think that's fine. It’s important to have a strong private mortgage insurance market, but we have always said with the use of proceeds the primary purpose would be to do what we need to do to correctly capitalize the business so they are competitive and then second to delever, those are two top priorities. And then we’ll look at other things going forward, capital management, etcetera.
Geoffrey Dunn - Dowling & Partners
Okay. Kevin, sorry, one follow-up. Just to push you a little bit, when you say there is items around the periphery that might need to be adjusted. Would you write the majority of the 680 to 620 offering you have today as currently priced under the proposed seniors?
Geoff, I think we have some subsidization across our credit profile and we would have to -- that’s all we were writing. We’d have to take a different look at it. I think in terms of how we’d approach to from a pricing standpoint. It's not all we’re writing but what I’m trying to do and Rohit and his team were trying to do here is really balance the -- making sure we have a good solid capital framework that will make us absolutely part of the process going forward and balancing it against some access for first-time homeowners.
And so I think there is a policy element there, you got wean as well as really having a strong regulatory framework. We’re supportive of where this things at. We got some opportunities and we’ll be working actively with them to participate in this public common period and I think we’ll end up in a good place.
Geoffrey Dunn - Dowling & Partners
Okay. Appreciate your comment. Thanks.
Thank you, Geoff.
Ladies and gentlemen, we have time for one final question from Ryan Krueger of KBW Investment Bank.
Ryan Krueger - KBW Investment Bank
Hey, thanks. Good morning. I had a question on 513 which is helpful. The $150 to $175 million incremental benefit to earnings this year from the LTC rate increases, I guess, if I grow that up on a pretax basis, its $230 million to $270 million. Is the way to think about it that the future benefit is kind of the difference between that $230 million to $270 million and your ultimate $250 million to $300 million expectation for incremental premiums and that the mix of how it kind of earned and will this change or have less reserve benefit but more premium coming in?
Yeah. Ryan, I think that’s a reasonable way to look at it. As Tom mentioned, we expect to ultimately have $250 million to $300 million of incremental premium. I think what we’re seeing is we implement the rate actions as obviously those people into relatively small proportion people that are electing reduced benefits are taking in non-forfeiture option.
When they take those options at the time that they get the rate increase noticed, they make that decision. And there is a median impact on those policies in the current period and that comes in the form of a reserve release. But obviously, once the rate actions are fully implemented, then it’s just a matter of getting the ongoing premium on people and all the future periods for those people who are paying a higher premium.
Ryan Krueger - KBW Investment Bank
Okay. Understood. And then in terms of this severity on LTC claims, I understand the difference been active life reserves and claim reserves. I guess, my question is does the trend you’re seeing on claim severity, is that really isolated to policies to have lifetime benefit? In other words, if those trend continued, it would’ve really have much of an impact on the newer blocks business you’ve written or could have some impact there longer-term as well?
You know, what we have to look at and we have looked at in past, we’ll looked at it now is that what are the claim termination rates and benefit utilization things look like a lot of other complex factors that Tom talked about. And those vary by lifetime versus non-lifetime benefits side as all types of factors. So we’ll have to take a look at it.
Clearly claim termination rates are very different this quarter by about 5% versus the prior quarter and that had big impact on existing claims. On new claims this quarter, we did see an uptick on new claim severity where we had a dynamic or we had a little bit higher mix than we have in prior quarter of lifetime benefits, claims coming with lifetime benefits or with higher DBA. And again, when we think about the DLR, I think in terms of the existing claims and we have to look at all the factors that go into all those different parts of claim pattern smaller policies.
Ryan Krueger - KBW Investment Bank
Okay. Great. Thank you.
One additional point is that and if you look at one of the slides and you can see that over time, over the years that we’ve been issuing different blocks of policies. There is a row in the chart that illustrates the percent of lifetime in each of those blocks. So that’s been dropping down pretty significantly, especially over the last several years. And as I think, we discontinued lifetime benefits couple years ago.
And ladies and gentlemen, I will now turn the call back over to Mr. McInerney for closing comments.
Thank you, Operator and thanks to everybody on the call. We appreciate all the questions on long-term care and how complex it is, the margins and those reserves and those timing of the premiums and so on and so. Hopefully, we've made some progress today in educating you a little bit more on that, it is complex. And the follow-up that you have with Amy and her team, hopefully she can help you understand that if you have any future question.
And as I said earlier, with exception of our long-term care business and we know, we have issues with the back book. That’s not new news, what’s really new is that the three months in the second quarter and the claims we’re seeing. But I understand why we didn’t get many questions on GMI or the other business, but I would say, I hope what doesn’t let lost in the overall result is that the three main GMI platforms are performing very well.
I think that we continue to expect, while there is seasonality in USMI. We’ve continued to expect that USMI will have significantly increased earnings this year over last year. And as the 2009 blocks and forward become a bigger part of the portfolio and that should continue over time.
And we’re also -- I guess, we also lost sight of the fact that we did do the Australia IPO, we’re very pleased with that. So, while we have significant issues on a back book and long-term care, I think overall, putting it in context. I think we’re making progress on the overall turnaround strategy. We never said it was going to be easy, we always have said much more work needs to be done and particularly on the long-term care and on the back book.
But hopefully, we’re getting into a much better regulatory framework going forward. And so that I believe, the ultimate answer in long-term care is it can be a very good business. But we have to change the regulatory framework because no one can estimate policy holder behavior and where the claims side is maybe where interest rates are. And so hopefully, this is just more evidence to the regulators and we’ll make them more comfortable moving to the new model.
So, thank you for your questions. We’re obviously going to do a lot of work in the third quarter. We’ll have more to say in the third quarter call as we get through this claim review that we’re doing on the claim reserve in the 50,000 policies.
So with that thank you very much. And look forward to talking to you next quarter.
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.
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