Genworth Financial, Inc. (GNW)

Q2 2010 Earnings Conference Call

July 30, 2010 9:00 AM ET


Alicia Charity – VP, IR

Michael Fraizer – Chairman, President and CEO

Patrick Kelleher – SVP and CFO

Kevin Schneider – SVP; President and CEO - U.S. Mortgage Insurance

Buck Stinson – President, Insurance Products, Retirement and Protection


Ed Spehar – Bank of America

Andrew Kligerman – UBS

Steven Schwartz – Raymond James & Associates

Connie Deboever – Boston Company

Mark Finkelstein – Macquarie Research

Jeff Schuman – KBW

Darin Arita – Deutsche Bank

Jordan Hymowitz – Philadelphia Financial

Donna Halverstadt – Goldman Sachs

Eric Berg – Barclays Capital



Good morning ladies and gentleman and welcome to the Genworth Financial second quarter earnings conference call. My name is Christie and I will be your coordinator today. (Operator Instructions). I would now like to turn the presentation over to Alicia Charity, Senior Vice President, Investor Relations, Ms. Charity, you may proceed.

Alicia Charity

Thank you, and good morning. Thanks for joining us for Genworth Financial’s second quarter 2010 earnings call. Our press release and financial supplement were released last evening and are posted on our website. Again this quarter, we’ll also post management’s prepared comments following the call for your reference.

This morning, you’ll first hear from Mike Frazier, our Chairman and CEO, and then Pat Kelleher, our Chief Financial Officer. Following our prepared comments, we’ll open the call up for questions and answers. Kevin Schneider, President and CEO of U.S. Mortgage Insurance; Pam Schutz, Executive Vice President of our Retirement and Protection segment; Jerome Upton, Chief Operating Officer of our International segment; and Ron Joelson, our Chief Investment Officer, will all 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, Form 10-K, filed with the SEC in February of 2010. This morning’s discussion also includes non-GAAP financial measures that we believe may be meaningful to investors. And our supplement and earnings release, non-GAAP financial 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. In addition, the results we will discuss today for the Canadian Mortgage Insurance business reflect total company results, including the minority interest unless otherwise indicated. And now, let me turn the call over to Mike Frazier.

Michael Fraizer

Thanks, Alicia, and thanks everyone for your time today. We made important progress in the second quarter executing our strategy and delivering improved financial results. International earnings had nice growth supported by improving economic conditions in Canada and Australia and the success of our ongoing loss mitigation efforts. U.S. Mortgage Insurance made good strides towards profitability supported by loan modification and other loss mitigation efforts. Specifically, I am encouraged about the continued favorable trends in new delinquencies that we are seeing fueled by both seasonal patterns as well as the burn-through of exposures associated with the 2005, 2006 and 2007 books.

The size of the private mortgage insurance market and dynamics versus the FHA remains a challenge, which I will touch upon later. We had mixed performance in Retirement and Protection. Sales were strong, particularly in life and long-term care insurance, along with positive net flows in wealth management. Earnings took a nice step forward in long-term care insurance and spread-based annuities but fell in life insurance and fee-based annuities impacted by relative mortality performance, higher losses on certain term policies, and weak equity markets.

I am pleased to announce that we completed our excess cash redeployment plans putting some $3.5 billion back to work hitting the high end of our targeted range. In my mind, second quarter represented an inflection point for the investment portfolio, where we clearly moved from plain defense to plain offense. Impairments were relatively low and are expected to remain low, and we moved early to get cash to work using a variety of strategies to manage investment in the low interest rate environment.

We also look closely at what may be prudent to adjust product pricing in the event of a prolonged low interest rate environment. This morning, I want to focus on three areas. First, how we are investing for growth in targeted areas. Second, developments on the regulatory front around the globe, and finally on the size of the market for U.S. Mortgage Insurance and what needs to change for future premium growth.

Let’s turn to where we are investing in key growth areas that support earnings and return expansion. We see organic growth as our biggest opportunity with targeted complementary acquisition opportunities and selective entry into new markets. We focus on three fundamental agendas to grow organically, introducing refreshed or innovative products, driving distribution penetration and expansion, and improving value-added support services and capabilities.

On the product front, we continue to drive adoption of new products to support growth in life insurance. The more capital efficient product suite introduced in the fourth quarter of 2009 has been one of our most successful new product launches. And we will further refine our offerings. Distribution feedback has been very positive given the attractive price point and flexibility the new products offer and this is apparent in our sales trends. Importantly, we see additional opportunities with new products in long-term care, wealth management and lifestyle protection.

Turning to distribution, a good example of our expansion drive is new lifestyle protection, where we are focused on selling products in new ways. Rather than solely selling products at or near the time of the new lending transaction, we are broadening programs with our distributors to market protection for their clients with various types of outstanding financial obligations, using appropriate coverage types. In addition, we are broadening distribution channels to support sales with a larger dedicated team in place to do so.

Finally, a good example of where we are adding services and capabilities is in new wealth management. Here, a key competitive advantage lies in service and technology differentiation. As a result, we are investing in sales coverage, technology, and new products to position the business for additional growth longer term. In the near-term, this will somewhat mute earnings growth, but should provide a good payback.

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