Genworth Financial, Inc. (GNW) February 10, 2012 10:00 am ET Executives Georgette Nicholas - Kevin D. Schneider - President of U S Mortgage Insurance Martin P. Klein - Chief Financial Officer and Senior Vice President Dean Mitchell - Analysts Donna Halverstadt - Goldman Sachs Group Inc., Research Division Geoffrey Dunn - Dowling & Partners Securities, LLC Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division Edward A. Spehar - BofA Merrill Lynch, Research Division Scott Frost - BofA Merrill Lynch, Research Division Presentation Operator
In addition to our speakers, Dean Mitchell, Chief Financial Officer of U.S. Mortgage Insurance segment, will also 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 fourth quarter earnings release and the risk factor section of our most recent annual report on Form 10-K filed with the SEC in February 2011, and our third quarter Form 10-Q filed with the SEC in November, 2011. This morning's discussion also includes non-GAAP financial measures that we believe may be meaningful to investors. In our quarterly financial supplement and earnings release, non-GAAP measures have been reconciled to GAAP, where required, in accordance with SEC rules. Today, beginning on Slide 2, we will cover a discussion on the portfolio, trends and losses, our assessment on embedded value, claims paying ability and the quality of new business. We will then discuss our capital strategy and provide an overview of the strategic options we have considered for the U.S. Mortgage Insurance business and provide perspectives on why we have chosen the current path we are executing. We will end with an update on the state of the industry and activities in Washington. And now, let me turn the call over to Kevin Schneider. Kevin D. Schneider Thanks, Georgette. And thanks to all of you for joining us today for this extended Investor Update. As you can see, I will be providing some review of 2011 trends and results, along with some of our current expectations for 2012. While we are providing these forward-looking metrics to provide further information regarding our current expectations, please recognize that there continues to be challenging economic conditions pressuring the housing industry, and unfavorable employment conditions are still impacting the ability of homeowners to stay current in their mortgage payments. Thus, meaningful changes in the current trends could have material impacts on our expectations.
So let's begin on Slide 3 where I will provide some perspective on the key messages we are communicating in the presentation today.First, risk discipline entering the cycle resulted in differentiated portfolio mix with go forward implications. While there are areas we wish we had taken action faster or not insured at all, we are seeing differentiation in the performance of our portfolio when compared to others. Changes in reserve expectations negatively impacted 2010 and 2011 results, and our current expectation is new delinquencies should drive losses going forward. Risk to capital is elevated, but our claims paying ability is sound. New business adds positive economics and benefits claims paying ability. Our new business is performing better than pricing with a 20%-plus return on equity and is contributing very little to new delinquency development. And we have plans in place to continue to write new business. Multiple factors drive return to profitability, and we will outline the key drivers for you. And finally, we evaluated all strategic options for this business and are following a chosen path while pursuing alternatives. With that, let's begin with a look at a comparison of Genworth's primary portfolio of risk in-force as of December 31, 2011, compared to other private mortgage insurers on Slide 4. We believe the Genworth portfolio, on a relative basis, is a result of a differentiated risk discipline heading into the financial cycle. And although, we too, have been significantly impacted by the loans insured during 2005 to 2008, the difference in delinquency rates is an illustration of our relative risk appetite. We underweighted our participation in riskier products such as Alt-A loans, bulk and Wall Street securitized loans and short-term adjustable-rate mortgages. In addition, we have strengthened our reserves over the last 2 years to a level that, based on our knowledge, is the highest in the industry.
While these reserve-strengthening actions result in a risk-to-capital level that is above 25:1, we believe we have the comprehensive balance sheet strength and a capital strategy that provides a corridor through which to manage new business writings.Turning to Slide 5, we have provided a snapshot of our total flow risk in-force as of year-end 2011 by vintage, along with the comparative reserve levels for each book year. As you can see, the 2005 to 2007 book years are still a large part of our portfolio with a disproportionate percentage of reserves. These books have been impacted by several years of home price depreciation, especially in Sand State geographies, as well as underwriting guidelines and practices that were not consistent with today's credit policy and underwriting standards. We view the 2008 book of business as the transition vintage with overhang from the 2007 products and pricing, but better performance for business written in the second half of 2008. You can also see that the 2009 to 2011 books have very low reserve levels as the delinquency development of these books has been favorable. Slide 6 shows the composition of our current delinquency inventory by aging category, as well as our flow reserve per delinquency over time. This demonstrates the effects of reserve strengthening in 2010 and '11, as well as the change in aging composition while overall delinquencies continue to trend down. With that overview of our portfolio, let's now get into a more detailed discussion of loss development and our expectation for 2012 on Slide 7. At a very basic level, incurred losses are driven by 2 factors: Either,one, a change in expectation of claims on the current inventory delinquencies; or two, new delinquencies. A leading indicator of the need for a change in reserving can be aging, net of cures on delinquent loans. But aging pressure must be assessed as either temporary or permanent prior to making a reserve change. Read the rest of this transcript for free on seekingalpha.com