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Genworth Financial Inc. (NYSE:GNW)

Q4 2009 Earnings Call

January 29, 2010 9:00 am ET

Executives

Alicia Charity - VP IR

Mike Fraizer - Chairman, President and CEO

Pat Kelleher - SVP and CFO

Kevin Schneider - SVP, President & CEO, US Mortgage Insurance

Pamela Schutz - EVP, President and CEO, Retirement & Protection

Jerome Upton - COO, International Mortgage Insurance Segment

Ron Joelson - SVP, CIO

Analysts

Ed Spehar - Banc of America/Merrill Lynch

Mark Finkelstein - Fox-Pitt, Cochran Caronia

Andrew Kligerman - UBS

Steven Schwartz - Raymond James

Dan Johnson - Citadel

Jimmy Bhullar - JP Morgan

Darin Arita - Deutsche Bank

Donna Halverstadt - Goldman Sachs

Mike Grondahl - Northland Securities

Operator

Good morning, ladies and gentlemen. Welcome to Genworth Financial’s fourth quarter earnings conference call. My name is Aaron and I will be your coordinator 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. (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, operator, and welcome to Genworth Financial’s fourth quarter 2009 earnings conference call. Our press release and financial supplement were both released last evening and are now posted on our website and we will also post management’s prepared comments following the call for your reference. This morning, you will first hear from Mike Fraizer, our Chairman and CEO; followed by Pat Kelleher, our Chief Financial Officer; and then Kevin Schneider, our US Mortgage Insurance President and CEO.

Following our prepared comments, we will open up the call for questions and answer period. Pam Schutz, Executive Vice President of our Retirement & Protection segment; Jerome Upton, Chief Operating Officer of our International Mortgage Insurance Segment; Ron Joelson, our Chief Investment Officer 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 may contain forward-looking statements. Our actual results may differ materially from such statements. We advise you 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 and Quarterly Report Form 10-Q, each of which have been filed with the SEC.

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, we will talk about our 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.

With that let me turn the call over to Mike Frazier.

Mike Fraizer

Thanks Alicia and thanks everyone for your time today. Let me begin by saying that I am pleased with the solid improvement in both sales and earnings results we reported this quarter and we will remain very focused on continued execution of our strategies to keep building on this progress. More specifically, the actions we took in 2009 to manage risk and put cash back to work, coupled with improved economic and housing market conditions in most markets and our targeted growth strategies are clearly paying off.

Importantly, the fourth quarter trends are a good indicator for improved earnings power and results in 2010 and beyond.

Today, I will focus on a few key highlights in each of our business segments and then the investment portfolio. Then Pat and Kevin will provide more detail on market trends and performance in our business segments.

Before getting into these areas, I would note that we continue to see improving markets overall, but economic recovery in general will be gradual in most markets and consumers remain stressed. I would characterize our view as optimistic, tampered by the realism of a choppy recovery and appropriate caution regarding markets that are still trying to find their footing, or the possibility of unforeseen events.

Starting with Retirement & Protection, our refined specialist strategy centered around main street life insurance, long-term care insurance and independent advisor wealth management offerings with a more targeted focus on the annuity front is proceeding well. Basically, we see all consumers and in particular, main street consumers reassessing how they build their personal safetyness, what advisors they want to go work with going forward, what approaches make the most sense when it comes to investing and how to do all this in a balanced way with less reliance on self-insuring through the equity in their home or gains that they may have in a stock portfolio.

At the same, distributors, producers and advisors are looking for companies who can be their growth partners. These dynamics intersect well with our enhanced focus and capabilities within the Retirement & Protection areas. For example, the launch of our new life insurance product suite has been quite successful, with strong initial trends in overall submitted policies. As a reminder, we introduced our new Colony Term UL product, which is basically a term life value proposition sold on the universal life chassis. Here, we have optimized the pricing and reserve patterns with the UL structure to allow it to be much more capital efficient.

On the universal life side, we have optimized our pricing to match it with a reasonable actuarial definition of lifetime to deliver a capital-efficient product with a strong value proposition and competitive rate for main street consumers. In addition, long-term care sales also showed sequential growth and we see a gradual improvement in that market. Finally, we are pleased with the momentum building in our Wealth Management business as evidenced by positive net flows and gains in market position versus competitors.

Turning to International, I am encouraged on two fronts. First, housing market and economic conditions in Canada and Australia have continued to improve, with stabilizing or improving trends across home prices, unemployment and GDP. In lifestyle protection, the swift action we talk to re-price business and restructure distribution agreements, is showing strong early results. Our re-pricing efforts are on track, with most large contracts completed at year-end and you can see the associated lift as part of our earnings this quarter.

In 2010, we are targeting incremental earnings lift of approximately $30 million from these efforts, feathering into earnings throughout the year. In Europe, we remain cautious about the recessionary conditions that have persisted in many countries resulting in higher unemployment and lower levels of consumer lending and we do not expect quick economic recoveries, so we anticipate continued pressures from some claims durations extending and lower levels of new business, which would negatively impact revenue in Europe. On this last point we are not standing still and are diligently pursuing the growth strategies outlined at our December Investor Day, to generate additional new business at appropriate returns.

Finally, in US mortgage insurance I would highlight three areas where results in the quarter showed sound progress. First, there were good indications that US MI earnings cropped in 2009 and that we are on a gradual upward trajectory, that we might expect some choppiness quarter-to-quarter. Extensive loss mitigation efforts are helping lead this transition along with loss results, which are showing signs of improvement.

Importantly, in the bulk business we entered into an agreement that will significantly reduce both risk in force and associated risk of losses going forward. Second, US mortgage insurance took a solid step forward with new business results. The prudent changes we made to guidelines and geographies where home prices and economic conditions have improved resulted in a nice uptick in market share which we estimate increased from 9% in the third quarter to 14% at year-end.

The business we are riding reflects a lower risk profile with much higher returns, driven by product, pricing and underwriting changes.

In addition, we expect more business to shift back to private mortgage insurers from the FHA overtime. And third, US Mortgage Insurance ended the year with a risk-to-capital ratio estimated at 14.6 to one, a very good position to support growth while maintaining a sound buffer against unforeseen events. This reflects both our differentiated performance and a benefit from changes to Federal Tax Laws that expanded the use of tax losses.

Finally, turning to the investment portfolio, I would highlight two areas. First, we made nice progress reinvesting excess cash balances. As of the end of the third quarter, our target was to reinvest $2.5 billion to $3.5 billion by mid-2010 and we reinvested $1.5 billion of that in the fourth quarter and remain on track to complete our reinvestment program by mid-year. Next, the actions taken to diversify and reduce risk in the investment portfolio are showing results with both impairments and non-realized losses continuing to trend down.

In closing, as we look to 2010, we see a clear path forward with some pluses and minuses in the environment. In particular, solid new business growth, stronger investment income, continued, though staged, improvement in global economies and housing markets and the benefits from loss mitigation efforts are all good leading indicators for improved earnings and returns. We remain diligent on the capital and risk management front and continue to benefit from our streamlined organization structure. With the wind more at our back from a market perspective, we will keep investing strategically in product, distribution, service and technology areas to drive smart growth and ROE improvement.

With that, let me turn it over to Pat.

Pat Kelleher

Thanks Mike. Results in the quarter marked clear progress in executing the plans we shared with you at our December Investor Day and position us well for 2010. Overall, these financial trends and developments have improved and include strengthened economic and housing market conditions in Canada and Australia, good results from loss mitigation, re-pricing and new product introductions, and higher net-investment income.

Let me start with Retirement & Protection. Here, we are seeing growth in several key areas, investment income, and sales growth in life insurance, long-term care and wealth management. On a sequential basis, we had good investment income growth from two areas. First, cash reinvestment, which lifted total earnings by about $11 million after-tax, with majority or about $9 million in the R&P segment. Second, in limited partnership investment income in retirement and protection. This grew earnings by $15 million with a $2 million gain in the quarter compared with a $13 million loss in the third quarter.

Although, we are aware of the potential for additional limited partnership investment losses in the first quarter when year-end financial information becomes available, overall, we expect improving cash reinvestment and positive limited partnership investment income results to continue into 2010. In life insurance, sales increased 10% sequentially. As Mike indicated, early trends in our submitted volume are encouraging for our new product suite.

Individual long-term care sales improved 7% sequentially. We are seeing potential for a rebound in the long-term care market following declines in industry sales earlier in the year. We are particularly encouraged by the positive trend in our independent distribution sales channel.

In Wealth Management, we saw the third straight quarter of positive net flows and a 50% increase in sales year-over-year. Here, we are investing in new capabilities to penetrate new markets and we expect to see earnings growth in 2010 as AUM increases. Adding results up from a statutory perspective, the consolidated risk-based capital ratio decreased moderately from 370% to an estimated 365% during the quarter. Key drivers here were our expected operating results, funding new business growth and a modest level of impairment. Given the growing sales momentum in life and long-term care insurance, we contributed $200 million of capital from the holding company in January, which will further strengthen the life insurance company’s statutory capital base as of year-end 2009, increasing the risk-based capital ratio to approximately 390%.

While our capital plan now provides for a more robust business growth, we continue to make prudent allowances for potential investment impairments and credit migration and with that in mind our target for year-end 2010 risk-based capital is to remain at or above 350%.

Turning to the international businesses, the Canadian economy and housing markets overall continue to improve with some regional variations. Unemployment declined modestly from a peak of 8.7% in August to 8.5% in December. Housing affordability remains solid with mortgage interest rates ending the year at approximately 4% down from around 5% at the end of 2008, and home prices in our target markets continue to gradually increase from comparatively lower levels a year ago. Most regions have now recouped the declines experienced during the recent downturn.

As a result, the flow delinquency rate in Canada has been stable for the past two quarters at about 34 basis points down from 36 in the second quarter, reflecting improved economic trends. The loss ratio decreased by two points, marking the second consecutive quarter of improvement. Accordingly, total earning’s in Canada remains down and consistent with third quarter levels.

Turning to Australia, you have a similar story to Canada, with the economic and housing markets continuing to recover, again, with some regional variation. The economy is generating GDP growth with nearly 2% growth forecast for the fourth quarter. Unemployment rates declined modestly from the peak earlier this year of 5.8% to 5.5% at year-end. Housing affordability deteriorated moderately reflecting a reduction in the benefits provided under the government first-time homebuyer programs, as well as an uptick in mortgage interest rates to approximately 6.3%. I should note that mortgage interest rates remain well below the high of 9.4% experienced in mid-2008.

Home prices continue to increase from relatively low levels in fourth quarter 2008 and most areas have recouped the home price declines experience during the recent downturn. In 2010, we will monitor how these recent favorable trends develop in both Canada and Australia. Given these trends, we are optimistic that earnings in these markets will remain at or above current levels with some normal quarterly fluctuations. From a sales perspective, low mortgage insurance in Canada has now increased for three sequential quarters, reflecting improving economic and housing market conditions, while in Australia, the strong sales we have seen throughout 2009 slowed modestly in the fourth quarter, as borrowing rates increased and as government stimulus programs were trimmed, as we expected, given the economic recovery.

Turning to Europe, we saw a second sequential quarter of improvement in lifestyle protection earnings, which here hurt by rapidly rising unemployment in the first half of 2009. Two factors have contributed to this improvement trend. First, new claim registrations have slowed in the last six months and have now stabilized, reflecting a decline in the face of unemployment growth. Second, we completed the majority of our planned product re-pricing and distribution contract restructuring during the quarter. These impacts have outpaced loss pressure from increases in claims duration as the absolute level of unemployment remains high. Our re-pricing initiatives will continue to benefit earnings in 2010 and if high unemployment persists, as expected, will offset further increases in claims duration.

Finally, from a capital plan perspective, Canada, Australia and lifestyle protection all ended the quarter with sound capital ratios in excess of targeted levels. In Australia, we extended external reinsurance relationships as part of our capital strategies to continue to provide for growth, additional risk dispersion and capital flexibility. This quarter we received reinsurance commitments of AU $250 million, which really highlights the strength of our Australian business. This coverage was effective on January 1, 2010 and will incrementally pressure premium growth. In some, our international businesses are well positioned to support operating and parent holding company capital plans going forward.

Briefly turning to the investment portfolio, here we have seen good progress on our cash reinvestment plans, favorable earning trends in limited partnership investments, declines in net realized losses and we have been able to take advantage of favorable market conditions to de-risk the overall portfolio, while diversifying credit risk exposure.

Looking more closely at realized losses by asset class, about three quarters or $57 million of fourth quarter impairments were in residential mortgage-backed securities and remain concentrated in sub-prime and Alt-A. Recent trends in these impairments are at a much lower level than earlier in 2009 and are emerging in a more predictable manner. We have seen a significant decrease in impairments for corporate bonds and high-grade securities, which totaled just $10 million in the quarter. Here, we have diversified our holdings, reduced our relative waiting in financials and benefited from market improvements. Our high-quality commercial mortgage loan and commercial mortgage-backed securities portfolio continue to perform very well with only $7 million of impairments in the quarter.

Finally, unrealized losses were $1.4 billion and are down substantially from $4 billion a year ago. The unrealized losses had been drifting down modestly through most of the quarter, but increased a bit in December ending the year at about the same level we had in the third quarter. In January, we have seen unrealized losses trend back down about $200 million in total. Before leaving investments, I will review the impact of changes in regulatory capital requirements on the commercial mortgage loan and structured asset classes that were adopted at yearend. Starting with our commercial mortgage loan portfolio, we were subject to changes in the Mortgage Experience Adjustment Factor or MEAF. As Genworth loan portfolio has consistently experienced very low levels of losses relative to industry experience, our risk based capital requirement is determined by the MEAF minimum. As of yearend 2009, this minimum level was increased. At our target 350% RBC level, this increase required approximately $90 million of funding. We also have the introduction of two new rating firms for structured securities, Bendigo for RMBS and Realpoint for CMBS. Together, incorporating the ratings from these two firms benefited capital by about $85 million at our target 350% RBC level. Collectively, these three regulatory changes had almost no impact on required funding at our target 350% RBC level.

As we reflect on generous progress over the last few quarters, we are encouraged by the trends we see across our businesses. As we move through 2010, we will build on this foundation and focus on profitable new business growth. Much of the groundwork for this growth is now in place with recent product introductions, improved service capabilities and an intense focus on expanding key distribution relationships. Adding it all up, we finished 2009 with two sequential quarters of earnings improvements and we are positioned for growth and ROE improvement going forward.

With that I will turn it over to Kevin.

Kevin Schneider

Thanks Pat, and good morning. I want to share few perspectives on US mortgage insurance business, particularly in the context of our financial results this quarter which show improvements as we end a challenging 2009. As a reminder, we have been executing and remain focused on a five-point strategy, actively managing through a challenging housing market, continuing our loss mitigation focus, managing capital on a self-contained basis, growing highly profitable new business while at the same time participating in the regulatory reform debate that will play out over the next few years.

This morning I will cover three areas. First, the improving dynamics that we see developing in our books of business. Second, the continued market headwinds that remain a challenge and finally, how these combined factors influence our focus in 2010. So, let’s begin, where we see improving trends, many of which have been developing for several quarters. I will group them into five areas, delinquency accounts, average reserves per delinquency, loss mitigation, risk to capital and new business growth.

First, flow delinquency inventories are increasing at a slower rate, up 7% from Q3 to Q4 versus 14% from Q2 to Q3. This is encouraging as we would have expected a further increase in the rate of growth in delinquency accounts from traditional seasonality. Second, a decline in average flow reserve per delinquency which has trended down for the past three quarters from a high of $23,100 in the first quarter to $18,900 at yearend. This decrease is being driven by two influences.

First, a shift in the mix of delinquencies from high loan balance geographies and alternative products to traditional loan product delinquencies with a more national distribution driven by unemployment. This shift drove about half of the decline in average reserve per delinquency this quarter. The other half is from our continuing loss mitigation efforts, which are impacting delinquencies with higher average balances. Third, loss mitigation has a direct benefit which continues to increase. This quarter we were encouraged by the number of modifications coming out of the HAMP program, which increased from essentially zero last quarter to $35 million or about 2000 modified loans this quarter. In addition, the number of Genworth delinquent loans in the HAMP trial period nearly doubled to 22200, based on the data from servicers and the GSEs. In our view, this is a good directional indicator of future modification potential and benefits.

Fourth, we have experienced improvement in risk-to-capital ratios as a result of specific strategies and other market factors. The ratio was down to 14.6 to one in the fourth quarter, down sequentially from 15.1 to one, and well below the 25 to 1 traditional regulatory limit. This quarter we benefited specifically from a change in the Federal Tax Law that extended the look-back period for net operating losses. This increased statutory capital by about a $108 million. Importantly, we are pleased with the execution of our capital plan in a very challenging 2009. We have successfully delivered on the self-contained plans we have previously communicated and maintained good growth capacity.

Finally, we start growth in new business and increase market share. In the third quarter, we expanded our underwriting guidelines to reflect improved conditions in many markets, which prudently increased our addressable market. As a result, we estimate that our share increased from 9% to approximately 14%. This resulted in a sequential improvement in flow new insurance written of 20%. We expect market share improvement to continue in 2010 and drive growth in NIW.

With that said, the MI industry is not out of the woods. The industry is facing several challenges including increases in unemployment and the potential for additional home price declines. Particularly, as the so-called shadow inventory makes its way through the foreclosure process and adds to the existing supply of available housing inventory. Let’s discuss how Genworth is positioned to face these market headwinds, starting with unemployment.

Most experts still predict unemployment to peak in early 2010, averaging about 10.2% for the full year. We are planning the recovery of jobs to be gradual, with unemployment in the low 10% range for the rest of 2010 and remaining elevated in 2011, in the 9.5% to 10% range with some improvement in 2012. We did see rising unemployment pressure delinquencies in the fourth quarter and would expect that to continue in the coming year.

Turning to home prices, while housing inventory has shown some improving trends over the last several months, the current strains on the system are increasing the length of the loss cycle. As a result, there is growing inventory of 90-day plus delinquents, inferred closure and real estate owned properties. It is widely accepted that some portion of this shadow inventory will ultimately work its way through foreclosure and increased existing housing supply.

Industry sources estimate that this inventory may be as much as four million homes and could pressure home prices depending on the level and timing of when this supply hits the market. Given the potential pressure on housing that this dynamic could cause, Genworth is taking a prudent view of home prices. In our assumptions, we are planning for additional 5 to 10 points of price decline. Our home price recovery expectations once price is bottomed are, again, gradual and conservative in 2011 and 2012 timeframes.

With that as context, I want to share some thoughts on the key matrix we are watching as we position this business for a return to profitability. First, we will continue to monitor delinquencies, particularly the rate of growth, the cured and the average reserve per delinquency taking into account normal seasonality, which we do expect to see in 2010 which typically drives lower delinquencies in the first half of the year and an uptick in the third and fourth quarters. We would expect delinquency growth to slow and eventually decline as new delinquency decrease and the cured increases. The cured is an important component of delinquency development and to date has been pressured given the housing market.

As an offset to this pressure, we still feel that the recent challenging books of business from 2006 through the first half of 2008 should experience their peak delinquency levels during 2010, allowing a return to more traditional delinquency development patterns. We also expect the declining trend in average reserve per delinquency to continue on a gradual basis, as we have seen encouraging trends in the mix of delinquency growth. Second, we remain focused on loss mitigation. We expect total loss mitigation savings in 2010 to be at or above the level we saw in 2009, with an increasing portion coming from HAMP and other modification programs. Third, we will continue to have risk-to-capital levels well within the regulatory requirement, which will support our final objective to prudently increase new insurance written and market share.

In closing, we have taken decisive actions to position Genworth to aggressively manage through a challenging environment. Our approach to loss mitigation will drive additional benefits. We continue to execute a self-contained capital plan and we are growing profitable new books with better price and less volatility and with that, we will open it up to your questions.

Question-and-Answer Session

Operator

Ladies and gentleman, at this time we will begin the Q&A portion of the call. As a reminder, please refrain from using cell phones, speaker phones or headset. (Operator instructions). We will hear first from Ed Spehar with Banc of America/Merrill Lynch.

Ed Spehar - Banc of America/Merrill Lynch

Thank you. Good morning. Two questions. First, Kevin on US MI, is it reasonable to think that the pre-09 book of business could be profitable in 2012? And then just I had another question on international.

Kevin Schneider

In 2012, I have not run it out that way. I way I think about it right now though and the way it is performing right now is, 2009 is performing very profitably. The first half of 2008 and 2006 through to the first half of 2008 books are under pressure right now and 2005, I would say, is creeping into that category a little bit right now but should improve going forward. Prior to 2005 books are all profitable and so when you bring that whole thing together we think that the ‘05, ‘06, ‘07 and early ‘08 books are all going to peak this year in 2010 and then should start coming down by the time we get to 2012, as we add additional new books of profitable business going forward. In 2011 and 2012, when you roll that whole thing together it bodes well for profitability of the entire portfolio.

Ed Spehar - Banc of America/Merrill Lynch

I guess, what Kevin, I am trying to get is when we think about a book of business that is underperforming after we see peak losses, how do you think about the performance of that, it’s clearly not going to be what you had hoped it would be but how do you think about the performance of a book after it reaches peak losses, can it be profitable?

Kevin Schneider

Well, we had some books of business that over time are going to be unprofitable books of business. These are the books that have weathered through in these challenging periods. I do not think they are going to get better going, and go forward and recover once it gets back to the peak periods. What you got to think about though is as the way this business works, is when you continue to lay around new books of flow business, those new books of flow business with their profitability will eventually overwhelm the under-profitable books and so you think of it as almost a crossover point and that way two to three years down the road you get a crossover point where those new books of profitable business are overwhelming. The negative performance associated with those that are bad.

Ed Spehar - Banc of America/Merrill Lynch

Okay, and then the international question is, is this a business that if we just think about it, not talking about annual performance but just looking at the earnings level that we see today, is this a business that we should be thinking about as at least a single digit grower or do we have a longer term view from the current level of earnings today?

Pat Kelleher

This is Pat and I will take that. Definitely yes, the way to that and I will explain why. If I look at the improving market conditions in Canada and Australia and the way those markets have performed over a period of time and as well, the positioning of our business to participate in the recovery and growth going forward, I think we are well positioned. If I look to Europe and lifestyle protection and how that business is performing and the positioning of the business changing with the re-pricing, in a difficult set of circumstances from an unemployment perspective currently, things have stabilized, and over time things will improve and this business is well positioned to participate in the improvement there.

Ed Spehar - Banc of America/Merrill Lynch

I just wanted to make sure that I understood one thing that Kevin said. When we talk about a book of business that generates a loss overtime for US MI, I mean, we can have accumulative loss for a book of business, but it does not mean we are going to lose money every year from that book. That is correct, right?

Mike Fraizer

This is Mike. First, two dimensions and Kevin you can fill on some other perspectives. Going back to your general question, I would suggest you think of a pair of book ends when you look at the portfolio in aggregate. As Kevin said, if you look at ‘04 and prior, you feel good about that, you have a lot of embedded appreciation in it, the performance you can see. ’05 a little bit of a mix to a pretty clear negative story we have laid out when you think of ‘06, ‘07 and the first half of ’08. Then you get the second half of ‘08, ‘09 and all the subsequent and that is a positive bookend and you are adding to, because now you have all of the full benefits of the pricing increases, the tighter underwriting, the clean nature of the traditional business.

With that in mind then you look at that middle and you are applying the loss mitigation to those very tough vintages. So, those will not be as bad as one might have thought once you got in and understood that the aspects of non-compliance, in some cases, fraud and of course we dealt with that quite directly. That is how you can think of the model and the dynamics going on, but getting back to you asking sort of a crossover point, you need to think about crossover point on two fronts, one is what is going on sort of a quarterly run rate basis and as we talked about in investor day, sort of a mid-2011 crossover point when you are thinking of the quarterly run rate and then depending on the mix of that, you will see what that look like in a totally year basis for that business to transition and go positive and we have not given guidance on that but you can see the dynamics, I think quite clearly in this corner, quarter end from Kevin’s commentary and certainly, the dynamics continue the scene that we laid out at investor day.

Kevin Schneider

As a book of business once things peak and the losses start coming down, delinquencies are going to peak but you still have claims associated with those, you are going to ultimately have to pay overtime but as they come down, as the loss troubles come down, it really depends on what the persistency of that book is at that point in time. If that persistency sticks long enough and you can bring in up to additional earned premium associated with that book, sure those are potential ultimately look forward to be profitable in the given year but my expectations right now with the negative cumulative loss is associated with those tough books so far is that we should not have high expectations for being profitable. Again, to Mike’s point as we said at investor day, we see that crossover point for us in terms of our overall profitability on a quarterly basis about mid-2011.

Operator

We will hear next from Mark Finkelstein with Fox-Pitt, Cochran Caronia.

Mark Finkelstein - Fox-Pitt, Cochran Caronia

I guess just a follow up to Ed’s question, Kevin when do you think delinquencies will peak?

Kevin Schneider

Yeah, what we said Mark at our December investor day is that about mid-2010, we would expect those books to come together and peak at that point in time and by that I mean the books of ‘06, ‘07 and the first half of ‘08.

Mark Finkelstein - Fox-Pitt, Cochran Caronia

Okay, so when we think about the 7% increase in delinquencies, we have a couple of more quarters and then by the third quarter, you should actually start to see moderation in the DQ activity?

Kevin Schneider

Yeah, what you have to look at is, you do have some seasonality that you should expect. So, in the first couple of quarters, you are going to see some downward movements in those numbers. We would expect associated with that traditional seasonality that I mentioned in my prepared comments. In the back half, traditionally it goes up a bit. Throughout that cycle though you still got how these books are ultimately developing and we expect those, in particular, those tough book years to peak about mid year.

Mark Finkelstein - Fox-Pitt, Cochran Caronia

Okay. I wanted to go back to your comments on growth in market share. I mean obviously you have FHA tightening, you have a major competitor that was removed from a top lender. I mean, how are you thinking about NIW in 2010? You talked about further growth in market share, I mean where would you see that potentially going?

Kevin Schneider

I don’t know that we, I think about market share in terms of at least where we should have historically been as a major player in the market, so with six players we came out of the fourth quarter with an average we think of about 14%. I think we have got some more upward runway associated with that as it relates. Market share to me though is not really the biggest thing we are going to be looking at right now. To your point, it is the size of the overall MI market that is ultimately going to drive where we end up from an NIW standpoint. You have to put those two things together.

I would expect as the FHA continues to tighten up and we move through the year, that should expand the size of the private mortgage insurance market and given our capital position and the way we managed it so that we can take advantage of this on the upside of this recovery, we are really well positioned to see some additional market share associated with that.

Mark Finkelstein - Fox-Pitt, Cochran Caronia

Just one final quick question. I guess Pat, I was a little surprised by the $200 million downstream in January into the life company and I guess the question I have is, I mean, was that really more growth related or is that more to kind of just add a buffer to the current capital position, knowing the capital filling at the holding company and you have potential to pull it back out if you needed to?

Pat Kelleher

That was really motivated to support the growth in our business. When I looked at the trends, we ended the quarter with a strong risk-based capital ratio at 365% and the trends are good. We wanted to support growth. We are seeing a nice trend in sales. I would acknowledge that it is nice to have a cushion to deal with unforeseen market developments, but I really did want to maintain a strong capital position relative to peers. The only other thing I would say is we do have plans for dividends in 2011 and 2012 as we had laid out on investor day and we are well positioned to meet those as well.

Operator

We will hear next from Andrew Kligerman of UBS

Andrew Kligerman - UBS

Just to follow up on RBC question. Do you come out at the end of year at 350%, if you do not downstream anymore capital? What do you think you will end the year if you do not downstream?

Pat Kelleher

Well we did in January lift the capital position to the point where we were starting the year at 350% and if you look at our trends in operating income, our new business and investment result, it is very encouraging.

Andrew Kligerman - UBS

So 350 would be a yearend target?

Kevin Schneider

No, our target is to end the year in excess of 350%. That is just the benchmark that we laid out and our trends are good at this point with nice operating results and favorable trends in investments. I would certainly expect to end the year north of that 350% level.

Mike Fraizer

Andrew this is Mike. Just remember we have a process issue here. In other words, we were at 370%. We went down to 365 on a comparable basis but when you make subsequent contribution, you have not filed your stat statements yet so then you make that contribution and the 365 goes up under the reporting to 390%. So effectively, under stat basis you will be starting if you want to look at that as a stat book at 390 and then moving from 390 as we move through the year to at least a target at or above the 350, so just think about those process steps and then it becomes clear.

Andrew Kligerman - UBS

Shifting over to popular US mortgage insurance business, magic fourth quarter earnings will be. They said that Bank of America, is doing business with them due to dissatisfaction with their rescission practice, and I believe there is a lawsuit, there is another data point. They indicated that Bank of America, countrywide, etc., accounted for 12% of their float new insurance written in '08; 8.3% new insurance written in the first three quarters. And that is going to go away and there is a lawsuit. So the question to Genworth is, are you facing similar actions by your mortgage lenders about rescission practices because you have done very well with it? And on a more positive note, to what extent could you gain market share as a result of weakness with Magic?

Mike Fraizer

Andrew, the way I will answer your question is this way. We are facing are involved in a similar type losses or not. That can be, are there ongoing disputes or ongoing not disputes but disagreements over the approach the entire industry is taking as it relates to the industries contractual rights and obligations. Yes sure, there is. This is a, nobody is happy with the level of the recession in the market place today, but you know Genworth’s act in accordance with our rights and obligations on to the policy. We pay all legitimate claims. We are not required to pay claims associated with fraud, misrep and noncompliance with our policy. So, I commented by saying number one in this industry, the private mortgage insurance is in around to insurance operating risk, we insure risk and so that for lot of what we are seeing right now things got a little sloppy to this cycle as it relates to going forward and our opportunity to pick up increased share. You know, this is going to be a flexible year. It is going to be fluid as this plays out across the industry, there is only so many players as a limited number of mortgage insurers available in the space and so when somebody losses allocation in one place, they are going to pick up some of bit at other place and I think you know some of that might be reflective in some of the progression we saw in the quarter.

Andrew Kligerman - UBS

You sound pretty comfortable with your practices that you are not going to run into any legal issues with your clients.

Mike Fraizer

I am very comfortable that our approach is very consistent with our contractual rights and we are very careful and cautious in the way we go through this. Do people like the outcome in the industry, not all the time, but I feel pretty good about our position at this point.

Andrew Kligerman - UBS

Okay and just one last follow up, $35 million dollar saving from the modified loans through HAMP, terrific and you mentioned in the release that it represented 2000 delinquent loans and now you are sitting on approximately 22,000 that are currently pending, I mean any mass that kind of help me out in terms of you know, should I do the algebra and divide $35 million by 2000 and then take that figure and multiply it times 22,000 to make that loans and that is where I should be thinking, I mean is it that?

Mike Fraizer

Good logic.

Andrew Kligerman - UBS

How do I think about what to expect?

Mike Fraizer

Here is what I think about it. Number one, it has ramped up. There is more success in getting the loans up the backside, so as we sit on 22,200, think about that relative to our average reserve per delinquency as a starting point in terms of the potential that might be available. How much of that is going to come out and ultimately get cured out the backend is really still a wildcard, but we did have nice improvement and nice development on the quarter, so when I think about our overall workout and cured progression, we have and we did see some nice trends in the quarter, I think it is just getting started and ramped up.

The other thing you will see that Treasury is continuing to evolve that program and they are continuing to work on some of the documentation challenges that we have all read about associated with getting out and improve out to the back into that program and I think that will ultimately help things going forward. The real issues here is it is too early to call what the cured are going to be coming out of this, but what I am encouraged by is on the loans that we have seen so far that have been modified and come out of them, you know, we have seen an average reduction in payment of 29% on the Genworth loan that has been modified to the program. That is big number, 25% improvement in your monthly payment is something that gets people wealthy as I have mentioned before, cash flow and big successful ultimately in (inaudible) their home and so that is where I am encouraged and I think we are going to see this continue to trend positive going forward.

Andrew Kligerman - UBS

Okay and then the one last. Loss mitigation activities, $290 million, what portion of that was represented by recession?

Mike Fraizer

Yeah, I think it is on our supplement. It is not, okay, you know, I would say on the quarter are more than, you know, I would say it is probably 2/3 of it roughly.

Operator

Now from Raymond James, we will go next to Steven Schwartz.

Steven Schwartz - Raymond James

More questions for Kevin I am afraid. Just to follow up on Andrew's HAMP line of thought, Magic was able to offer up the cure rate on trial loans from April, May, and June and what percentage had defaulted. Kevin, I was wondering if you could do the same?

Kevin Schneider

Yeah, again, I think it is too early to base any facts on any cured that one could calculate off that, but just to further dive down into what I was just sharing with Andrew, if you expected 2008 in the modification, we did in 2008, those modifications had a re-default fall rate of about 55%. We will start that with a baseline understanding. Those were largely not modification that lowered the borrower’s monthly payment. There is some recent reporting out from the OTS and OCC just talking about modification data today and they are basically saying that when you have no payment change in the re-default rate, in the modification, it is generally performing it about a 66% re-default rate, so our numbers were still better on that in 2008. With the 10% to 20% payment reduction, you know the re-default rate goes down to 48% and that what I was just talking about with a [20 plus percent] payment re-default rate, their data says that that could go down as low as 39%. Again, what we have seen so far is the 29% reduction rate, so we were encouraged by it, but I am just not in the position to tell you where I think that is going to perform at. We will get sharper on that as we go forward, as we get more data and more observed experience.

Steven Schwartz - Raymond James

Let me ask you just we have discussed already the outlook for decline in delinquencies probably topping out in may be early third quarter, somewhere around there, do you think that the level by year-end 2010 will be lower than the level year-end 2009?

Kevin Schneider

I think, it’s going to be close to call, I am not going to come out definitely on that that, right what I do see is, I am seeing some favorable development in news, in new delinquencies, you know, (inaudible) rate which have been pressured, we have not had a little bit of favorable outcome on this, we are going to work through the seasonality that’s here to see where it ends up but all in all, with the, when we experience the peak of those 2006 the first half 2008 books that will be, once we have turned that corner then I think we will have a much better handle on one where exactly see that.

Steven Schwartz - Raymond James

Okay and then, one last one, on the outlook for reserve per delinquency is that it was going to continue to come down slowly? Given the fact that you are still looking at negative HPA, I am wondering which you think is going to drive that?

Kevin Schneider

Well, I think the real driver, just like they were in this quarter this quarter the drivers were two-fold, having the same per mix so we got, we have less loan is going to delinquent in the high loan balance rates, less loan is going to delinquent and in fact some improvement in the all day product, so as you get more lower traditional loan balance as part of the delinquency calculation you just get a mix shift that’s associated there. I think we will continue to have gradual improvement from that as these others, risk your product start to burn out and they start to decline. Secondly we are going to continue the benefits from our loss mitigation efforts and we had a little bit of benefit from that in the quarter as well and I think those are really going to be the drivers going forward.

Steven Schwartz - Raymond James

I mean, so there is still room on the geographic side and still remain in the product

Kevin Schneider

I believe so.

Operator

And moving now we will go to Dan Johnson with Citadel.

Dan Johnson - Citadel

Thank you very much. Really most have been answered so far. Maybe one last one. Certainly the HAMP program is evolving, I guess is a good word for it. There has been some discussion about them firing up the second lien aspect to the program. Would that have much benefit for you or is it generally assumed if a primary mortgage has a second lien they probably don't have much MI? Maybe if you could help there that would be great.

Kevin Schneider

In the macro, I think the bigger benefit there would just be the overall system and the ultimate amount of inventory that might get shared and freed up and not end this way moving into that existing inventory population with the downward pressure that could create on pricing. Finally that’s the biggest point. I do think it is an interesting reflecting back on the challenges we had few years ago relative to second lien and piggy bank loans compare to private mortgage insurance but today those folks that avoided mortgage insurance and use those products to avoid us, really the ones are challenging experience some of the most pain associated with getting modified I think that is going to be some add are going forward in the regulatory reform going forward as well.

Operator

And next we will go to Jimmy Bhullar, JP Morgan

Jimmy Bhullar - JP Morgan

The first question I had was just for Mike. If you could talk about your Canadian MI business, is this more of a core holding or are there scenarios under which you would consider selling the rest of your stake? And then second, for Pat, just your views on the investment environment. How much of a headwind do you expect credit migration to be in 2010? Do you think the worst is behind us or do you think that you might see some more downgrades in your portfolio as the year goes on?

Mike Fraizer

Jimmy this is Mike. We are very pleased with the performance of our Canadian mortgage insurance business. We think it has a lot of upside. We have no plans to have a further sell down. We do appreciate and are glad that the market is recognized the value of that franchise and I think there is some market can draw between Canada and Australia on that front and I leave with it that. Pat you want to pick on investments?

Pat Kelleher

Sure thanks Mike. Our trends in credit migration have been favorable. It has been less and less over the last couple of quarters and in particular that relates to a lot of the de-risking of the investment portfolio that has occurred over the past several quarters and I will ask Ron to comment on that further.

Ron Joelson

Yeah actually in the fourth quarter the credit migration was a net positive so upgrades were slightly ahead of downgrades. We think that trend is probably going to continue for a while of course it is hard to say exactly what will happen in 2010 but the preliminary indicators that we have suggested there is slight or modest improvement.

Operator

And next Darin Arita of Deutsche Bank please go ahead.

Darin Arita - Deutsche Bank

Another question on the US mortgage insurance side. It seems like the HAMP program is progressing well and, Kevin, you mentioned the Treasury's efforts on the documentation front. But can you also talk a little bit about this new HAFA program and how that might affect Genworth's loss mitigation efforts?

Kevin Schneider

You see FHA side of it you are talking about.

Darin Arita - Deutsche Bank

No the HAFA the home affordable foreclosures alternative

Kevin Schneider

You may be one up (inaudible) right now because I gave that exactly. I think writing about the view changes that doing right now I think there is a couple of things they are focusing on. They are trying to focus on bringing, the documentation challenges as you said which have been a challenging on the backside of the program, get the documentation out, trying to bring that’s in front of the program with that success or when you bring that in more to come into the program upfront or come out to the backend of the program and ultimately which I think will be a big piece. Secondly, I think FHFA is going to participate more aggressively in these problems as they have before whether that has no impact really on generous direct results roughly provide broader support to the overall industry in terms of (inaudible). I think the interesting thing is what we will there still be the possibility going forward for some additional principle and write down expansion to all these programs and I think that’s really probably fall in this overall piece and that does not impact us. That could only help us in their current view of it which is if somebody gets your principles written down we stay on the coverage it does not cost us for that process to happen, the borrow gets put it at better position ultimately has more like the written standards in our homes I think those things are positive .

Darin Arita - Deutsche Bank

All right, that is helpful. And then just turning to Pat, as you are reinvesting this excess cash and also investing new premium dollars that you are getting what are the new money yields that you are seeing?

Pat Kelleher

In general, the new money yields are at or above 5% yield overall.

Operator

And our next question comes from Donna Halverstadt, Goldman Sachs.

Donna Halverstadt - Goldman Sachs

Thank you. Yet another US MI question and then I have a question on a different area of the business. I was interested in the GSE Alt-A cancellations and was curious if there was something particularly unique to that block of business that predisposed it to successful negotiation between you and the GSEs. Or was it not unique and could it be viewed as a precursor of more such agreements to come, either with yourselves or even across the MI industry?

Kevin Schneider

Donna first of all what was unique about those programs as they were programs that as we work through a loss mitigation efforts you know we found a lot of problems with some of those loans and working with GSEs. We were able to come to a commercial that allowed us basically to take down our risk enforce associated with those loans and our exposure going forward so we think about that the total roughly we had associated with those loans which is probably about 237 million in that range and settlement at 182 puts that behind us significantly reduces our GSEs Alt-A roughly a very little bit more to (inaudible) and we going forward that is another thing, it is going to benefit I think our overall delinquencies in the future because that was 50 million between those two numbers a potential future losses that could have placed through into those so number one that the issue secondly I think it is a validation of our overall practicing approach because there was the hard work we have done to look at those loans and look at them early the way we do and our delinquency process to allow us to properly document and to make sure we are very thorough in our assessment of whether opportunities are there, that allow us to get to a good decision with the group.

If I could just add on, what we have left in bulk is largely all federally home loan back business. I mean and this stuff is performing 2% or low (inaudible) highly performing business and that which is you know I would is fully reserve at this standpoint.

Donna Halverstadt - Goldman Sachs

Great. Thanks. The other thing I wanted to ask about in the prepared remarks, there were 2 comments, one these are both with respect to retirement and protection, after you commented on wealth management positive net flow, as you talked about it again in market position versus competitors and if you could give us more color on exactly what sort of gains you are seeing and likewise on the long-term care, you talked about a potential for a rebound in the long-term care market. I think you mean in terms of the industry and if so, what takes you to that perspective. Thank you.

Kevin Schneider

Let me that hand off to Pam.

Pam Schutz

On the wealth management question, we compete in the independent advisor market for assets management services known as the (inaudible) market and we track our share in that market on a quarterly basis, if you look at where we ended third quarter, we did pick up share. We are talking basis points, points but it does show that we are continuing to gain share.

On the long-term care question, what I would say is that we do say based on trends, first quarter of 2009 was terrible for the industry, it was lowest in sales in a decade. What we are seeing industry wide is an uptake from then, from first quarter in terms of sales and we are seeing really nice sequential sales growth in long term care from first quarter. What we are seeing as well is financial institutions which were hit the hardest in terms of sales in long term care, a pick up in that, which should grow the overall market and sales.

Operator

Ladies and gentleman, we have time for a one final question. We will hear from Mike Grondahl, Northland Securities.

Mike Grondahl - Northland Securities

Yes, thank you for taking my call. I do want to just say congratulations on a second quarter in a row that was very solid. You have started a nice trend. Specifically in Canada, the mortgage insurance business, can you update us on your capital structure thoughts there? I think you have very little debt up there and a lot of excess capital. Just kind of what your plans are there. And then also just kind of you repurchased another $91 million of debt, I think, in the quarter after some repurchase in September just kind of how you are thinking about that going forward too?

Kevin Schneider

Yeah, let me just start in general with Canada and then I will hand it off to Pat. When you look at Canada, you have seen this continued path of excess capital generation and that will continue as we move through this year. As we talked about it at our investor day, we have some options around that and continue to evaluate those options as we work here through the first quarter and front-end of the first half. First there is good opportunity at deploy capital towards additional growth. Second there is opportunities in areas in like dividend rate or even special dividends as well. Third as I comment upon it and I did on investor day and I think Pat did as well. You know, here is a business with no debt and you could probably put 10% debt on it as well which gives you additional fire power. So, we will let the team work through those opportunities but we feel good about all of the options. I will remind you that that you do have two boards here, in another words you have the Canadian board, you have the US boards, we have to respect board processes on those evaluation and would go through those before announcing final conclusions to the market, but we are focused on bringing the best strategies for the benefit of the company and the shareholders. So, Pat let me turn it over to you on the debt side.

Pat Kelleher

Sure, we did indeed purchased just over $90 million of debt and (inaudible) stock that is due to mature in 2011-2012, actually brings our total second half repurchase to almost $170 million. I would say, we would expect to continue to be opportunistic with respect to these repurchases and further I would say that we clearly intent to repay and restructure the credit facilities while in events of there maturity.

Operator

Ladies and gentlemen, this concludes Genworth financials fourth quarter earnings conference call. Thank you for your participation. At this time, the call will end.

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Source: Genworth Financial Inc. Q4 2009 Earnings Call Transcript
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