Genworth Financial (GNW)

Q2 2011 Earnings Call

July 29, 2011 9:00 am ET


Michael Fraizer - Executive Chairman, Chief Executive Officer and President

Kelly Groh -

Patrick Kelleher - Chief Executive Officer of Retirement & Protection, President of Retirement & Protection and Executive Vice President

Martin Klein - Chief Financial Officer and Senior Vice President


Andrew Kligerman - UBS Investment Bank

Darin Arita - Deutsche Bank AG

Steven Schwartz - Raymond James & Associates, Inc.

Unknown Analyst -



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Good morning, ladies and gentlemen, and welcome to Genworth Financial Second Quarter Earnings Conference Call. My name is Anthony, I will be your coordinator today. [Operator Instructions] As a reminder, today's conference is being recorded for replay purposes. [Operator Instructions] I would now like to turn the presentation over to Ms. Kelly Groh, Interim Head -- Head of Investor Relations. Ms. Groh, please go ahead.

Kelly Groh

Good morning, and thank you for joining us. A press release and financial supplement were released last evening and are posted on our website. This morning, you will first hear from 2 of our business leaders starting with Mike Fraizer, our Chairman and CEO; followed by Marty Klein, our CFO. Following our prepared comments, we will open the call up for a question-and-answer period. In addition to our speakers, Pat Kelleher, Executive Vice President and Chief Executive Officer of the Retirement and Protection segment; Kevin Schneider, Senior Vice President and President of our U.S. Mortgage Insurance segment; and Jerome Upton, Chief Operating Officer of our International segment; as well as Ron Joelson, Chief Investment Officer; and Buck Stinson, President of our Insurance Products for our Retirement and Protection business will be available to take questions. With regard to forward-looking statements and the use of non-GAAP financial information, some of the statements we make during the call this morning may contain 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 section of our most recent annual report on Form 10-K filed with the SEC in February 2011. This morning's discussion also includes non-GAAP financial measures that we believe may be meaningful to investors. In our supplement and earnings release, non-GAAP measures have been reconciled to GAAP, where required, in accordance with SEC rules. And finally, when we talk about International segment results, please note that all percentage changes exclude the impact of foreign exchange. And now, let me turn the call over to Mike Fraizer.

Michael Fraizer

I'd like to make 5 key points this morning. First, U.S. residential real estate and mortgage markets remain very challenging, and led to the action we took this quarter to strengthen USMI reserves and provide capital support for new business. That said, the USMI business does not and will not have an unlimited call on the capital of the enterprise. Second, we are making sound progress in our Retirement and Protection and International segments, as well as in our investment portfolio. I'll leave it to Marty to cover some specifics in these areas. Third, we understand that with our shares trading at a significant discount to book value, share repurchase is a compelling use of capital. There are however, certain constraints and consideration here, including rating agencies, maintaining risk buffers in financial flexibility, retiring debt and assessing medium- and long-term value prospects of the individual businesses. We believe these considerations can be addressed while at the same time, working actively to accelerate plans to return capital to shareholders and enhance shareholder value, and I'll update our perspectives on the timeframe for this. Fourth, we have a number of material efforts underway to optimize our business mix and capital deployment, and these contributed to our decision to use a portion of our Canadian shares to support USMI. And fifth, we recognize that the characteristics of our Life Insurance and Wealth Management business, as compared with our MI businesses, may appeal to different groups of investors, and are making progress on steps to facilitate the option of separating the company, along these lines, if and when it makes sense to do so. Let me provide some additional perspective and details on several of these points. Let's start with USMI. We believe the USMI industry has strong future potential and continue to advocate actively on that front in public policy circles. We did see several market trends deteriorate in the quarter, while also seeing new delinquencies fall. And we remain focused on addressing USMI risk issues directly and actively. Now trends like the ones we experienced could continue, so it is important to emphasize that the USMI business does not have an unlimited call on the capital of the enterprise. I understand the question regarding the rationale behind our decision to use $375 million of stock we own in our Canadian subsidiary to provide statutory capital support to USMI to facilitate the continued writing of new business. The idea of using these shares is not new. We previewed the potential use of these shares with rating agencies and regulators, and discussed it with investors on our first quarter earnings call and in other investor meetings.

Let me summarize the assessment that led to this decision, then turn and address how we approach limiting our exposure to this business. First, in USMI, it is important to distinguish between business originated before and after the middle of 2008, when underwriting and pricing changed substantially. We like the quality and expected returns of the books of business originated since mid-2008, which have already generated more than $200 million of premium. These books are expected to generate pretax income of over $430 million over their life with a return on equity in excess of 25%, with the performance metrics of these books tracking to that return level. As we look to the future, we believe this type of opportunity can continue. And therefore, there is real option value in writing new business. And there are several key regulatory and legislative issues under debate, the resolution of which could materially increase the size of the private mortgage insurance market. I'd note 3 areas, specifically. First, the administration has expressed its intent to reduce the role of the FHA in the origination market.

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