Genworth Financial's CEO Discusses Q1 2011 Results - Earnings Call Transcript

May. 5.11 | About: Genworth Financial, (GNW)

Genworth Financial (NYSE:GNW)

Q1 2011 Earnings Call

May 04, 2011 10:00 am ET

Executives

Alicia Charity - Vice President of Investor Relations

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

Michael Fraizer - Executive Chairman, Chief Executive Officer and President

Analysts

Joanne Smith - Scotia Capital Inc.

Andrew Kligerman - UBS Investment Bank

Darin Arita - Deutsche Bank AG

A. Mark Finkelstein - Macquarie Research

Donna Halverstadt - Goldman Sachs

Eric Berg - Lehman Brothers

Edward Spehar - BofA Merrill Lynch

Operator

Good morning, ladies and gentlemen. Welcome to the Genworth Financial's First Quarter 2011 Earnings Conference Call. My name is Carla, and I will be your coordinator today. [Operator Instructions] As a reminder, the conference is being recorded for replay purposes. [Operator Instructions] I would now like to turn the presentation over to Alicia Charity, Senior Vice President of Investor Relations. Ms. Charity, you may proceed when ready.

Alicia Charity

Good morning, and thank you for joining us. Our 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 Frazier, our Chairman and CEO; followed by Pat Kelleher, our CFO. Following our prepared comments, we'll open up the call for question-and-answer period.

In addition to our speakers, Kevin Schneider, Senior Vice President and President of our U.S. Mortgage Insurance segment; Jerome Upton, Chief Operating Officer of our International segment; Ron Joelson, Chief Investment Officer; and Buck Stinson, President of 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 this call 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 of 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 the International segment, please note that all percent changes exclude the impact of foreign exchange. And now, let me turn the call over to Mike Frazier.

Michael Fraizer

Thank you, Alicia, and thanks, everyone, for your time today. We made progress this quarter in a number of key areas that we identified for investors earlier this year. And overall, we are on track to achieve the goals outlined in our February update.

Progress in specific areas range from gradual to more substantial with disciplined execution. Clearly, we still have work to do in some important areas and have intense focus there.

This morning, Pat Kelleher and I will provide perspectives across 5 company priorities. Accelerating the recovery in return to profitability of U.S. Mortgage Insurance, ensuring that our international businesses maintain strong performance and continue to generate capital for the holding company, driving profitable new business in Retirement and Protection while improving in force performance, continuing to optimize the performance of our investment portfolio and managing our business portfolio to improve shareholder value.

I'll concentrate my comments on U.S. Mortgage Insurance, touch upon international and investments and wrap up on the business portfolio. Pat will go deeper on international, Retirement and Protection and capital.

Starting with U.S. Mortgage Insurance, we are seeing 3 fundamental dynamics in the in-force. First, total delinquencies are declining due to burn-through of credit risk from the 2005 to 2007 book years.

Second, loan servicers are becoming more active in working to clear existing delinquent loan inventory by pursuing a dual path, pushing on through to foreclosure while simultaneously evaluating potential loan modifications.

And third, strong performance continues for business added since mid-2008 with expected returns above 20%. Let's touch upon these more specifically.

Total delinquencies continue to trend down with delinquency burn-through in the 2005 to 2007 books, demonstrated by reductions in counts, which were better than benefits experienced historically from seasonal delinquency improvement. We saw self cures increase substantially through the quarter, which was evident in our cure ratios.

We did experience ongoing benefits from the government HAMP program and other alternative modification programs. So we are on track to achieve our targeted $400 million to $500 million of loss mitigation benefits on a full year basis, achieving $122 million of this in the quarter.

Looking ahead, we see 13% of our current delinquency pipeline under active review for modification and an additional 62% with modification potential. I would note, we have not yet experienced benefits from the broader Fannie Mae loan modification program announced last November that remains in a roll-out phase.

Turning to loan modification re-default rates, they are performing well and have settled in at the low end of the 30% to 35% ultimate range we anticipated, a big improvement over the 50% to 55% level seen in old-style loan modifications.

We did see claims develop in the quarter as expected, and experienced aging of delinquencies as loans get pushed through to foreclosure. We believe the contributing factor is servicers pursuing the dual-track process, the valuating loans for modification potential, while simultaneously moving forward with the necessary steps to enable foreclosure.

Looking at our new books of business put on after the first half of 2008, these now represent about 19% of our risk in-force and are performing very well. In fact, as I mentioned, they should deliver estimated returns on equity above 20%. An important issue here remains the industry recapturing enough share from the FHA of this attractive new business and us maintaining a desired share position versus competitors.

On the U.S. MI capital side of the equation, we have executed our flexibility plan effectively. First, we maintained sound claims paying ability under a variety of stress scenarios. We also now have state waivers or other regulatory communications in place which support writing new business above the 25 to 1 risk to capital rate -- level in 45 states, and can write new business in the other state using additional legal entities that have sufficient capacity.

Finally, we have demonstrated capital flexibility alternatives, which do not depend on cash held at the holding company, and have the potential to do so again if we consider it appropriate. An example of such an approach is to use securities we hold outside of our life companies and holding company in support of U.S. MI. Stepping back, the reserve actions we took in the second half of 2010 reflecting the aging of the delinquency inventory were prudent and aid in transitioning the business.

And as you all know, the housing market remains challenging. Though we would agree with the commentators who estimate peak to trough on price declines of around 20% for the segment served by the MI industry. This would suggest there's an additional decline of 5 to 6 points still to go, which we should experience during the course of 2011.

So to sum up U.S. MI performance, we are seeing expected transitions, and believe second and third quarter performance, which should benefit from some of the dynamics we are seeing, will add clarity around potential crossover points and timing for our return to profitability.

Now let me address developments in Washington affecting U.S. MI on both the public policy and loan servicing fronts.

First, we view the administration's proposals for reducing the government’s dominant role in housing finance through the FHA as a clear step in the right direction. Ultimately, that should mean an even greater reduction in FHA loan limits than current proposals call for.

In March, the proposed risk retention role was made public. It includes a definition that a qualified residential mortgage or QRM. The rule also provides that the GSE guaranty is an acceptable form of risk retention at present. As a result, our traditional market of ensuring GSE loans, which accounts for the majority of our business, would currently not be impacted by the proposed rule. As drafted, the rule is a very narrow in several respects, and could keep many good borrowers out of the market. Congress made it clear, the regulators ignored their legislative intent, a point it was driven home in a hearing at which Kevin Schneider testified a few weeks ago.

The rule is currently open for comment until June 10. Our primary focus during the comment period will be to remind regulators that there is clear and compelling data showing that comparable loans with mortgage insurance performed notably better than those without, and should be included in the definition of a qualified residential mortgage.

You also may have seen the announcements last week by the FHFA concerning loan servicing standards, that included 3 basic themes: early and repeated contacts with borrowers regarding potential for loan modifications, single points of contact within loan servicers to aid consumers through the loan modification process and additional financial incentives through incurred sound loan modifications. We see all these actions as positives for our loss mitigation strategies.

Turning to International. The businesses performed well and are on track to deliver about $350 million in dividends to the holding company in 2011, and a collective 100 basis points improvement in ROE to about 13%. We are seeing a gradual increase in market share in Canada and see this continuing. The market size in Australia remains challenged, impacting new business levels.

Loss ratio performance remained sound. Sequentially, we saw some negative seasonal in Alberta impacts in Canada with improvements in these areas already emerging. In Australia, we experienced initial economic impacts from the floods and are monitoring these closely to see whether they linger and if any combined effect emerges given higher interest rates and higher consumer living costs.

We were very pleased with the progress in Lifestyle Protection with earnings up nicely, and margins expanding in line with our total year targets from the combined effects of repricing and contract improvements, together with lower losses.

Given the consumer and lending environment in Europe, Lifestyle Protection sales remain flat. Though ongoing initiatives on activating new channels, further penetrating existing channels, new countries and expense management remain important.

In Retirement and Protection, we saw progress towards improving performance made clearer when excluding one-time or non-trendable items which created some noise in the quarter. Overall operating revenues grew 6%, with leadership line operating revenue growing 9.5%, tracking to our full year target.

New business growth was strong and occurred in the areas we targeted. And strategies to extract lower return capital from the Life business are progressing. Pat will provide more detail on Retirement and Protection lines and progress given his new leadership role there.

Turning to investments. The portfolio delivered another sound quarter as we continue to optimize performance. We had just $16 million of net investment losses during the quarter, and $37 million of net unrealized losses on the balance sheet at quarter end.

We also have small holdings in Japan and expect minimal impact from the tragic events there, and are comfortable with our minimal exposure to European sovereign debt.

Let me wrap-up with a few comments on business portfolio and capital management. First, we are pleased with the completion of our debt offering plans for the year. We will execute plans to reduce overall leverage to the 20% range as we outlined during our February investor update, using cash to retire debt maturing in 2011 and 2012.

Our goal is to first de-lever and then redeploy excess capital for the benefit of shareholders. If we can identify paths that accelerate this transition, while preserving ratings and taking into account other relevant factors influencing value and positioning, we will do so.

Second, we are in the final steps of our strategic review of the Medicare Supplement business that we mentioned in February. In addition, Pat will expand on plans to free low return capital from targeted life blocks.

Finally, as we aligned businesses to maximize commercial and financial synergies, we will be in a better position to harness the value of our tax assets effectively, which increases strategic and financial flexibility over time.

So in sum, we remain intently focused on the 5 priorities I opened my comments with, have made progress during the quarter, and will remain very focused on execution across these fronts. Before turning it over to Pat, let me just say that we are excited to have Marty Klein join the team and take over as CFO after finalizing the first quarter and are equally positive on Pat Kelleher's move to take over as CEO of Retirement and Protection. With that, let me turn it over to Pat.

Patrick Kelleher

Thanks, Mike. This morning, I'll provide perspectives on and a closer look at current quarter progress and performance trends in 3 key areas.

First, performance in capital plan progress in our International businesses. Second, performance trends in our Retirement and Protection segment including insights into the progress we're making toward improving in-force performance and shareholder value in our Life and long-term Care businesses. And finally, holding company and operating company capital updates, which illustrate how we positioned our operating businesses with flexibility to pursue appropriate capital strategies.

Starting with our international businesses. Earnings improved overall while sales trends were mixed. Capital generation remained strong and the international businesses are on track to meet overall ROE improvement and operating company dividend targets for 2011.

In Canada, flow new insurance written increased 5% year-over-year. We have achieved good growth by gradually increasing our market share, although the high loan-to-value mortgage market was modestly smaller than the prior year. The overall economy has been performing slightly better than anticipated, and we expect average home prices to be flat for the full year 2011 after benefiting from year-over-year increases.

Canada earnings were $51 million, up 20% from prior year, including a $9 million acceleration of full year tax benefit, partially offset by increased interest expense of $2 million, associated with 2010 Canadian debt issuances.

On a sequential basis, earnings increased $5 million as a result of the tax benefit, partly offset by anticipated higher seasonal losses and higher losses in Alberta during the quarter, with improvements emerging since then.

In Australia, flow new insurance written declined 27% year-over-year, reflecting the cumulative impact of 2010 mortgage interest rate increases, a slow return to the high loan-to-value market by some banks, and softening demand as a result of consumers increased focus on savings.

Estimates indicate that national home prices have moderated from mid-2010 levels, and the unemployment rate at the end of the first quarter remained flat versus the fourth quarter at 4.9%.

Australia earnings were $52 million, up 9% from prior year despite a $5 million after-tax addition to loss reserves relating to recent floods, impacting economic conditions in Queensland in particular.

In Lifestyle Protection, sales were flat, reflecting the ongoing lower levels of consumer lending in the past few years. Consumers remain cautious and are working to improve their personal balance sheets. We remain focused on increasing account penetration and expanding distribution channels to offset challenging market conditions. Lifestyle Protection earnings were $25 million, up more than 100% from prior year, as post financial crisis repricing and contract restructuring actions benefit earnings development, along with more stable, although still stressed, economy's unemployment conditions through much of Europe.

We remain on track with our goals for Lifestyle Protection to deliver about a 300 basis point improvement in operating margin and 200 to 300 basis point improvement in ROE in 2011.

Total earnings for the International segment were $124 million, up 30% from the prior year, as both Canada and Australia performed well, and as the Lifestyle Protection loss ratio and margins improved.

These international businesses are well positioned to meet our 2011 targets for overall ROE improvement of approximately 100 basis points, and $350 million of operating company dividends to the holding company.

Turning next to our Retirement and Protection businesses. Total Life Insurance sales were up 60% versus prior year and 15% versus fourth quarter. We continue to make progress with Term UL and traditional UL products and strong sales of our single premium link benefit product, a UL product with a long-term care rider, accounted for most of the sequential sales growth we've achieved in the quarter.

Life Insurance earnings increased to $52 million with revenue growth and improved term insurance persistency during the quarter, contributing to the increase. Mortality was moderately higher than prior year, but within the normal range of statistical variation. While better persistency and less exposure to both level period lapse risk, both contributed to improved earnings, a clear plus. I would note that one quarter of improvement does not make a trend.

In addition, life insurance earnings benefited from a favorable adjustment of $8 million relating to a change in premium taxes in Virginia during the quarter.

Total long-term care sales were up 16% versus the prior year and were consistent with fourth quarter results. Here, individual long-term care sales accounted for the year-over-year increase and also offset an expected sequential seasonal decline in senior supplement sales during the quarter.

Long term care earnings were $40 million, flat versus a year ago. Current quarter earnings included an unfavorable adjustment of $4 million relating to accounting for interest rate hedges.

Long-term care had a stable loss ratio just below the middle of the target range, and the Medicare supplement loss ratio reflected expected seasonal patterns.

Note that these seasonal patterns create an increasing trend of Medicare supplement earnings through the year, as claims early in the year are elevated until Medicare beneficiaries reach deductible limits, and then diminished significantly as the year progresses.

And Wealth Management had its eighth straight quarter of positive net flows, which combined with favorable market returns in the current quarter, brought assets under management to over $25 billion.

Wealth Management earnings were $10 million, down $1 million from a year ago, given some increased tax expense during the quarter. Pretax earnings were up 21% and reflect the AUM growth we've seen over the past year.

Total Retirement and Protection earnings were $127 million, up 4% from the prior year. Adjusting for a $7 million after-tax charge relating to our previously announced decision to discontinue new sales of variable annuities, earnings were up 10%.

With strong sales lifting revenue growth, improvement in Life Insurance earnings and progress implementing rate increases in long-term care, first quarter results reflect a good start toward meeting our 2011 ROE improvement and revenue growth targets.

We discussed during our February investor update that achieving desired improvement in Retirement and Protection segment returns will require meaningful changes to our in-force life and long-term care insurance portfolios. Here, I'll spend a minute or 2 to provide some additional color regarding how we're looking at life block transactions and the status of long-term care repricing initiatives to improve returns.

Starting with Life Insurance. Block repositioning transactions are an important area of focus. We have 2 clear objectives for block transactions, which we are targeting through reinsurance or other means.

First, we are targeting dispositions of selected blocks which exhibit earnings volatility. Here, we are evaluating transactions involving certain old blocks with a good history of intrinsic profitability, but where locked-in GAAP valuation assumptions are not reset to align with emerging persistency experience.

This misalignment creates earnings volatility. Simply put, these blocks are expected to be attractive to insurers and re-insurers who can reset valuation assumptions in a purchase transaction and achieve a more stable return profile. In turn, we achieve a more stable earnings growth pattern through a structured sale of such blocks.

Second, we are targeting dispositions of selected blocks, which have good mortality and persistency experience but low returns on capital due to excess U.S. statutory reserving requirements and related reserve financing costs. Such business may be more valuable to insurers or reinsurers in non-U.S. regulatory or tax jurisdictions where reserve funding and taxation costs are lower.

We expect these objectives to be achieved in a series of transactions starting in the second half of 2011 and through 2012. All in, the desired outcome would be to create meaningful redeployable capital via these transactions, while retaining customer relationships and servicing rights.

A portion of this capital would be expected to be used to create increased operating company dividends to the holding company, while a portion could support accretive new business. During the quarter, we made progress evaluating these opportunities.

Moving to long-term care insurance, we continue to see strong growth of our new generation products, which have produced good returns and stable loss ratios for the last decade. We're currently in the process of introducing our newest portfolio of long-term care products, which will include new wellness and care giving features and price increases ranging from 9% for some benefits and up to 20% for others.

The new product, which has already been approved in 33 states, is expected to roll out starting in the third quarter. With respect to our planned 18% rate increase on certain old generation long-term care products, we have achieved approvals for requested rate increases in 21 states. The impact of this rate action will begin to materialize in 2011, with the full benefit anticipated in 2012.

Finally, let's turn to capital updates. Here, we have positioned our holding company and our operating companies to maintain financial flexibility and pursue appropriate capital allocation strategies. At the holding company, we are successfully executing our plans to maintain strong financial flexibility and allocate capital to meet near- and medium-term objectives.

We currently have $1.3 billion of holding company cash and short-term securities. During the quarter, we issued $400 million of new long-term debt. This was above our planned $250 million 2011 issuance as there was an opportunity to upsize the offering and gain additional financial flexibility at the holding company, which is a clear plus from a ratings perspective.

Over time, we still plan to reduce overall leverage to our target of approximately 20%. At the U.S. Life Insurance companies, we ended the quarter with a consolidated risk-based capital ratio of approximately 370%, was well above our target level.

Our ratio declined during the quarter, primarily reflecting modest amounts of excess life reserves that we've taken back on the statutory balance sheet on a temporary basis, as we transition these to more cost effective excess reserve refinancing opportunities. We remain well above our target RBC ratio of 350%.

In our international operating companies, capital generation and capital ratios remain strong, reflecting the dynamics I outlined earlier in reviewing our businesses in Canada, Australia and in Europe.

I should note that our Canadian subsidiary has announced plans for a CAD $160 million repurchase of currently outstanding common shares during 2011. It would be our intention to tender shares for a repurchase on a proportional basis, and maintain our 57.5% ownership interest. This would bring an estimated USD $80 million to USD $85 million to the holding company.

And in U.S. Mortgage Insurance, as Mike indicated, we have plans in place to continue writing attractive new business and to manage U.S. MI capital without impacting planned holding company cash flows. With that, I'll open it up to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Ed Spehar with Bank of America Merrill Lynch.

Edward Spehar - BofA Merrill Lynch

A couple of questions. First, Pat, I was wondering if you could tell us what portion of your in-force Life Insurance block would fall into the 2 categories you highlighted as sources of potential dispositions?

Patrick Kelleher

Sure, Ed. When I say meaningful in a series of transactions over the second half of 2011 and 2012, I'm looking at, I'll say, several hundred million of capital being freed up for redeployment, which is in line with the plans that we have to accelerate the redeployment of capital and as well, to free up low return capital, while at the same time, building the franchise value of the Life Insurance business by adding accretive layers of new business. The intent there with reducing volatility, freeing up capital and growing the new business, is to produce both a better return on capital, as well as more stability in the growth of the return.

Edward Spehar - BofA Merrill Lynch

That's helpful. But, Pat, I was wondering if you could give us some sense of the reserves, the percentage of reserves for these categories. Not necessarily the stuff you're going to sell. I appreciate sensitivity around being too specific on that. But just generally, what portion of your total life reserves fall into the bucket that would be looked at?

Patrick Kelleher

Well, I haven't looked at it that way. I'm looking at capital as, I'll say, several hundred million. I would say that what we're going to be doing is taking a meaningful percentage of the business and redeploying or through sales, redeploying capital. From a reserve perspective, it really depends upon the mix of transactions that we include, and how much of this falls into each bucket.

Edward Spehar - BofA Merrill Lynch

Okay. And then I was wondering if you could give us some update on, I'm sorry if I missed it, on statutory earnings. Maybe the first quarter, if you have it, some sense of it. And also, just an update on what you consider to be the run rate stat earnings number?

Patrick Kelleher

I can do that. We haven't filed as yet our statutory statements. In the quarter, the numbers do tend to be volatile. So what I'd like to do is talk about statutory income on an annual basis, because that will give you an idea of run rate. That said, the reported annual statutory income has shown some volatility in the past few years due to investment losses, reinsurance transactions, variable annuity reserve changes where the hedging offsets are charged or credited directly to surplus. So adjust for those items, we are seeing in the last two years, consolidated pretax statutory income of approximately $300 million to $400 million. And we look at this as the statutory earnings for the insurance and annuity businesses before consideration of investment gains and losses. I would expect that 2011 statutory earnings for the year will be consistent with that level, probably in the $300 million to $400 million, before consideration of investment gains and losses. And we're focusing on a pretax as indicative of capital generation, because our life companies are currently in a tax loss carry forward position. So the pretax earnings accrete to capital. Is that helpful?

Edward Spehar - BofA Merrill Lynch

Yes, very much. Very helpful.

Operator

UBS Securities, Andrew Kligerman has our next question.

Andrew Kligerman - UBS Investment Bank

The first question just -- I'm getting a sense from some of your competitors in U.S. Mortgage Insurance that maybe foreclosures were stalled as there were issues with robo-signers and so forth. So there was a lot of litigation locking that up. To that point, could your claims have artificially been stalled in the first quarter, and could we likely see a big pick up in losses as we go into Qs 2, 3 and 4?

Kevin Schneider

Andrew, it's Kevin. I'll take that. I think, absolutely. You probably had some friction in terms of the ultimate claim settlement level that were going on in the market, given all the scrutiny that was being placed on the services coming out of the third and fourth quarter news cycles that we heard about. We still had foreclosures. They were not quite as much but they were still elevated. And you once -- you have to recall, once it goes to foreclosure, I mean, that doesn't automatically trigger a claims payment. So you got a little -- you have a -- still have some timing element there. So I would absolutely expect claims to continue to trend up. We got a lot of -- we have a lot of inventory here that's ultimately going to go claim but still needs to flush itself out through the system. So I don't think that is anything we don't expect and it's consistent with our current view of our reserving adequacy.

Andrew Kligerman - UBS Investment Bank

Okay. So there is a chance the loss ratio could be higher than 197 in subsequent quarters?

Kevin Schneider

I think what we really need to think about is where do we stand from the reserve's adequacy given those delinquent loans that are ultimately going to go to claim. I think we'll have to see how it plays out in terms of our -- our loss ratio isn't just driven by the paid claim amount. It's a combination of what's going on from an incurred standpoint and your paid claims. So I really think that we sort of performed as expected against the cure levels we anticipated. I think we're comfortable with the trends right now. But you will see claims I would expect continue to trend up while the balance of this inventory flushes itself.

Andrew Kligerman - UBS Investment Bank

Okay. So directionally, Kevin, hard to kind of have a vision of where we're going in the next 2, 3 quarters?

Kevin Schneider

In what aspects?

Andrew Kligerman - UBS Investment Bank

Just the overall loss ratio just in terms of -- I know reserves play a role in it. So just in terms of where you reserved and where the ratio is going. And I know you don't want to project to breakeven point in time but just curious directionally where you feel like Genworth is going.

Kevin Schneider

Yes. Again, I think what you ought to think about -- the way I think about it is, fundamentally, we're seeing some really favorable credit trends right now emerge across the board. So you step back and think about what we talked about both in our press release, as well as in Mike's commentary, overall delinquencies are continuing to decline. We saw them come down in every single region in the country on this quarter. That's a very positive. New delinquencies continue to decline as well as those old books of business burn through.

So as we see delinquency performance first time ever is coming down on those old books, and then you think about the loss mitigation benefit which, frankly, we think we'll continue to experience going forward and actually could get a little bit of additional lift in that based on some of the servicer’s performance. Those things all impact our loss ratio as well. So you got to sort of a balance what's going on in terms of your new development with your -- paid claims is all about where you are from a reserving standpoint. We feel like we're in good shape in terms of the adequacy of the reserves based on where we think -- see things going.

So it's what going to go on with those news and the interplay that has with some of the aging of delinquency that did cause a little pressure on the quarter. So that's the headwind, I would say, to the new development. And then on a positive side, we're seeing some self cure development that I think is indicative of some of the initial strengthening that's going on in the marketplace economically from a new jobs creation standpoint. So I'm not going to give you a directional view of the loss ratios, but I think it will be the ultimate interplay of those things. And ultimately, how the services do in terms of modifying some of those loans that are sort of being dual tracked right now, which will dictate the ultimate outcome. We'll have a much better view of it after another quarter or 2.

Andrew Kligerman - UBS Investment Bank

Okay. And then just to Pat, just in terms of the timing of those dispositions, I think, Pat, you mentioned the second half of this year were -- and then into 2012, if I recall, you maybe first presented this strategy in the fall. So I'm wondering in terms of timing, why not a lot quicker? Why not -- haven't we heard about several of these transactions already?

Patrick Kelleher

Well, we really highlighted it in our year-end earnings call where we started proceeding in a determined way to do this. It takes a little bit of time understanding the market, sounding the market in terms of who the best buyers would be. In some cases, they might be U.S. institutional buyers, in some cases, they might be international reinsurers. Though we're being deliberate about getting market color and differences in valuation from different markets so that we can get the best value for shareholders. We're not necessarily in a rush for a transaction activity, but we're trying to make sure we have the right transactions and it engineers the type of value creation that I described earlier.

Andrew Kligerman - UBS Investment Bank

And, Pat, you feel pretty confident that it will close? It would be so close.

Patrick Kelleher

I feel confident about the strategy. And I'll just give you a little bit of supplemental information that should be available generally. There's a Munich Re study that's done on the reinsurance industry in particular that's done along with the Society of Actuaries each year. And it really shows the amount of reinsurance activity relating to new U.S. written business. The reinsurance market is sizable and this segment of the market is sizable enough that it has its own name, portfolio transactions. So we're not inventing something new here. We're doing something that is very executable in my view.

Andrew Kligerman - UBS Investment Bank

Great. And then just finally, the timing of that $350 million dividend to the hold co from the international businesses. And then also was that timing of maybe combining those businesses with U.S. MI?

Patrick Kelleher

I'll speak to the timing of the dividend. I would expect that to happen in smaller increments throughout the year. With respect to your second question, I'll turn that to Mike.

Michael Fraizer

Yes. Andrew, we are in the process of re-segmenting the business reporting lines. We think we get some better alignment out of that. And with that alignment where you get to, say, either maximize or optimize your commercial synergies and continue to take advantage of the financial synergies, that will put us in a better position to harness the value of our tax assets effectively as I mentioned, which adds to your flexibility. So our plan were to see this occur by the end of the year.

Andrew Kligerman - UBS Investment Bank

Excellent.

Operator

And now we'll hear from Darin Arita with Deutsche Bank.

Darin Arita - Deutsche Bank AG

I guess going to the RBC ratio change. I think part of the pressure you mentioned was from the excess life reserves but I was wondering what the effect was from the very strong shelf growth in both life insurance and long-term care?

Patrick Kelleher

Darin, this is Pat. Roughly speaking, about three quarters of the change from $388 million to $370 million was the excess reserves that we're housing on a temporary basis. And really, the balance was the moderately stronger sales that we're seeing in the quarter. We're encouraged by that, and we think that's a good deployment of capital and will increase statutory earnings on a go-forward basis.

Darin Arita - Deutsche Bank AG

So it's fair to think that we could continue sales growth at this pace without much pressure on your capitalization?

Patrick Kelleher

Yes. There's 2 -- there's a couple of dynamics to consider there. We started a little over a year ago with a focused effort to improve our market share and sales and new business profitability in life and long-term care as part of our focus on the leadership franchises. And we're really just seeing in the first quarter that the revenue development year-over-year that that's starting to generate. And from a statutory perspective, of course, you have the strain in the first year but then you have renewal year profits. So as our new business grows by design, our renewal year profits are growing. And we're going to be managing capital very closely. We'll be very disciplined with respect to the amount of sales and capital utilization as we have been. But that's what we're trying to accomplish.

Darin Arita - Deutsche Bank AG

Okay. And then on the U.S. mortgage insurance side. I was wondering how much in additional securities are available outside of the life companies and holding company to help the capital?

Michael Fraizer

Dan, this is Mike. I guess, I'd look at it this way. First, I'd remind you that I think we've had very good flexibility to write new business, given the actions we've taken, as well I’d emphasize size, very strong claims paying ability and we test that, of course, under various stress scenarios. So if you look at the sort of the capital flexibility alternatives, beyond what we have in place and I've talked about, as I mentioned, we do have securities that are outside of the holding company, and are outside of the life companies. And if you look at those, I'm not going to give you a specific number today, the way I would look at it is we have adequate flexibility on that front to handle any of the scenarios we could see emerge.

Darin Arita - Deutsche Bank AG

I think one of the other things that's stacking is [indiscernible] still a consideration?

Michael Fraizer

Well, I guess let's split it on two fronts. I mean, one, we have two different entities that have sufficient capital to handle any of the areas where we don't have waivers or other communications in place, and that includes those types of entities whether they're stacked or not. Those are in place today. And if you go back to the first side of your question, and you said, what's an example of types of securities that you have in your system? I mean, just one example, for example, is using a portion of your MI Canada securities. So that just gives you an example of the first approach but these other entities are quite helpful in the meantime as we continue to pursue some additional waivers in other communications.

Operator

And now we'll go to Donna Halverstadt with Goldman Sachs.

Donna Halverstadt - Goldman Sachs

I had a question about a comment you made early on in your prepared remarks. And I believe you said that there's data out there that loans with MI performed better than loans without. And when thinking about the future demand for this product and some of the comments and analysis that the FHFA put out in mid April. I wanted to get your view on something. Their analysis showed that while MI may well be a vehicle for the reduction of loss severity upon default, did it really did not have a material benefit to the frequency of default? And it seems like a lot of the agencies involved in defining QRM are really looking at frequency of default. So were you suggesting that there is data out there that supports a reduction in frequency? Or were you suggesting that the conversation will expand to include severity, as well as frequency?

Kevin Schneider

This is Kevin. I think what we're suggesting is we have compelling data that suggested both reduces the frequency default, as well as the severity of default. Specifically, the work that was done and the analysis that was done analyzing above 80 LTV business throughout this cycle. So respectively from the 2002 I think through '07 books clearly comes back and suggest that for above 80% LTV loans that had MI on them, the only other alternative to that MI was essentially a simultaneous second or piggyback on. And when you compared the MI loans to those piggyback loans, number one, they went delinquent 32% less frequently than the piggyback loan. Secondly they, in fact, cured 54% more frequently than the piggyback loans coming all together for an ultimate favorability in terms of the ultimate default rate of 40%. So we can clearly go and demonstrate this and I would just contrast it to the way I interpreted the data set you just talked about that one of the regulators looked at, which was below 80% loans. 80% loans are not as risky as above 80% loans. I think that's not new information, it's the reason our industry exists. Above 80% loans are more volatile, and they're riskier type loans. But this data that we have and that we are sharing with all the regulators, I believe will clearly demonstrate both a reduced in -- a reduction in the incidence of default as well as in the severity of default and it's tough to argue with.

Operator

And now we'll hear from Mark Finkelstein with Macquarie.

A. Mark Finkelstein - Macquarie Research

I have a couple of follow-ups. I guess, Kevin, can you explain why you think that there's the potential that modifications could actually improve through the rest of the year? I would have actually thought the opposite.

Kevin Schneider

Sure, Mark. When I look -- I really think the opportunity for improvement comes down a couple of paths: one, that we believe some of the alternative programs are continuing to just ramp up. So we'd continue to see decent benefit from HAMP even though some of the size of the overall trials may be trending down in HAMP or the news. You're getting a lot less -- you're getting better action rates on those that are going through because the documentation required to get into the program was improved some time last year. So we're getting a better closing rate on the HAMP loans that we're seeing.

Alternatively, I think Mike mentioned, there are some new programs announced such as the one announced by Fannie Mae that really widened the population of potential mortgagees that might be available for the modification programs. Hits it outside of just an owner occupancy level, adjusts and provides a wider range of potential debt income levels that would be available for the programs. So all these things, I think, create a bigger net of potential borrowers who have the potential for it.

And I also think that the servicers are really getting focused on the job that's ahead of us. So I think we will -- I don't expect our numbers to trail off. We expect to be able to hit the $400 million to $500 million level of loss mitigation benefit. And for us, most of that is coming from workout. So the servicers are focused, we're focused, we're getting after borrowers early. The FHFA announcement that came out last week, it's actually become sort of a de facto servicer standard and expectation for those servicers. So if you get to those borrowers early, if you hit them more repeatedly and more often, those are all opportunities to get after. Many borrowers today that when this thing began took a long time before anybody even had a chance to talk with them. So directionally, that's why we think there's opportunity there.

A. Mark Finkelstein - Macquarie Research

Okay. I guess maybe just on a same point, in Mike's opening remarks, he mentioned I think 16%, 17% of the delinquency inventory is in a HAMP. Then I think there was a comment about another 60% could go into alternative mods I think were the words.

Michael Fraizer

Yes. If you look at our whole delinquency stack, and I'll reference you back to a similar type of comparison we showed you at the end of February. We had today, 13% of our delinquencies and of our total delinquencies are under some level of valuation, which means they're either in a trial or they have already been approved. So they're in some process or stage of modification right now. The 62% number that was referred to is if you think about everybody that's now available for the type of programs that are out there in the market today, everybody within the rest of our delinquency population, there's an additional 62% of our delinquencies that are eligible based upon the programs that are out there. Are they all going to get it? No. But it's become a wider -- it gives you a wider range of opportunities that will continue to be worked by both the servicers and by us.

A. Mark Finkelstein - Macquarie Research

I guess on that though, do you have a view on what a realistic expectation of that 62% may go into some form of a modification program?

Kevin Schneider

I would just stack -- one way you can think about it is take the estimated loss mitigation savings range that we've identified of $400 million to $500 million in the first quarter, we delivered $122 million against that -- of execution against that target. If you have -- and most of the benefits from us is coming from modifications and workouts, because we're largely have the rescission benefit behind us. So if you'll work back from there, I think you can sort of walk into what might ultimately be available. And that's the way I'd probably address it.

A. Mark Finkelstein - Macquarie Research

Okay. I guess just then on capital. A question for Pat. I guess is it fair to say that the plans that you're talking about in terms of freeing up trap capital in the life business, the several hundred million dollars, that is above and beyond everything that you talked about in your February 2 investor update, correct?

Patrick Kelleher

Yes. The performance targets that we gave for the Life business and ROE improvement in February 2 update did specifically exclude the impact of blocked transactions.

A. Mark Finkelstein - Macquarie Research

Okay. But I'm more thinking about at the holding company in terms of being able to deploy -- take the capital of the holding company, this is additional capital, correct?

Patrick Kelleher

This would be additional capital that was above and beyond what we had in our basic operating plan, yes.

A. Mark Finkelstein - Macquarie Research

Okay. And then are there any other changes in whether it's the amount of capital that you look out over the next couple of years in terms of pulling out of the reinsurance -- sorry, the international companies? Or any other changes in that cash flow number that we should think about? And other variances from what you gave us back in February?

Patrick Kelleher

Well, the thing that I would think of immediately is the work that we're doing in long-term-care with respect to the price increases on the In-force business. And also as well on the new business where we're introducing new products, because the intent there is to not only provide good value in the current market to consumers, but to, I'll say, manage the profitability on the return level back to what's appropriate for that business in a timeframe that's, I'll say, more accelerated than what was contemplated in our operating plans. To the extent that more develops, we'll update you as we roll through 2011 and we'll speak to that on an ongoing basis.

A. Mark Finkelstein - Macquarie Research

Okay.

Operator

Moving on, we'll hear from Eric Burke with RBC Capital Markets.

Eric Berg - Lehman Brothers

Given all the favorable development that you've detailed in this call, the improving delinquencies in domestic MI, the sharply improved loss ratio in your Lifestyle Protection business, the strong sales in Life Insurance and long-term care and the improvement that you say have been going on for several quarters, why aren't we seeing an overall -- I mean, where the money is, of course, in the ROE of the company, why aren't we seeing an improvement in the ROE of the company if your strategy is working? And when will we see it?

Michael Fraizer

Well, Eric, this is Mike. First of all, I think it's very clear you're seeing that in international. And as I mentioned, when you look at the lifestyle protection improvements, the continued performance in Australia and Canada in aggregate on a fairly notable piece of capital, you're going to get a 100-basis point improvement to 13%. Which is right in line with what we laid out as our track and our goals in our February investor update.

Secondly, is U.S. MI is still losing money. So we have some transitions underway. Kevin has addressed those, but it is what it is. Now as Kevin also noted and I think it was back in February but in general we have talked to investors. When you see a turn, a turn's an opportunity because you have -- you get crossover points of burn out on those 2005 to 2007 books. And then the dynamics of NIW kicking in, which I mentioned right now are -- it's in the 19% of your risk in-force and we're going to work hard to improve that. The crux of those issue is why Pat went into the topics he did concerning Life Insurance specifically that has a substantial part of the capital base and the ongoing actions to not only see the good performance of the new LTC block come through but to improve the pricing actions, the performance of the old LTC block. So it's really getting, when you just do the math, it's getting those actions and strategies executed in Retirement Protection that helped turn the entire enterprise. But I think you have to look at the component parts first, and then look at the aggregate second and of course, we're going to do everything we can to accelerate that transition.

Eric Berg - Lehman Brothers

That was a helpful -- that helped me think about, that was really great. One final question, actually to Pat. You made -- by saying that one quarter does not make a trend, Pat, I infer from that with respect to the improving relative to previous quarter's persistency of the Term Life Insurance business that it's just too early to declare victory. Is it possible that the problems that you suffered will abate or are you trying to convey to us through your comment that you really believe that this was sort of a blip but probably a favorable development to the quarter but a blip?

Patrick Kelleher

Looking of the persistency in the Life business, I'll give you a little bit more information. In the fourth quarter, we did see a modest amount of favorability, not statistically significant to persistency. It improved the quarterly earnings versus the third quarter by about $2 million after tax. That was a bigger number in the first quarter, $5 million. But I would say that this quarter is the first statistically significant shift. We did expect that the impact of persistency on those large 1999 and 2010 year turn blocks would moderate and that the impacts relating to that would diminish over time. It did move a little bit faster than I expected in the first quarter. So I really don't want to extrapolate that. I think there's a fair amount of statistical variation in the quarter-to-quarter number, so it will be prudent to get another quarter or 2 under our belt and we'll see what develops. But I'm encouraged and I'm not surprised by what we saw the first quarter.

Eric Berg - Lehman Brothers

Okay. That's a helpful elaboration.

Operator

Our final question today will come from Joanne Smith with Scotia Capital.

Joanne Smith - Scotia Capital Inc.

I just want go back to the comment about the further home price depreciation. And if that's the case, and we still have another 5% or 6% to go, how can we determine the potential impact on both delinquencies but also on a loss severity of the U.S. MI? And then I have a follow-up.

Kevin Schneider

Joanne, this is Kevin. When I think about it, I'll sort of take it back -- backwards the way the questions come. From a severity standpoint, we're sort of maxed out on severity already. I mean, we're paying the full claim amount. It's not as if additional home price declines is going to impact our severity more and our severities have been relatively stable. For some periods of time we're operating and when I say in about 110%, 111% type levels, so not a lot more pressure there from a -- and then as I think about it from a frequency standpoint or from a new delinquency development standpoint, our delinquencies have been developing in the faith have really -- we burnt through the people that can't pay for the mortgages. We burnt through the lousy credit profiles and the top mortgage related product. And even as home prices had continued to bump around and decline, we've continue to experience those declines in new delinquencies that we've been seeing quarter-over-quarter.

I think one of the more important influences going forward, from my perspective, is probably what's going to be going on with the job growth. I think job growth does a couple of things for you. Number one, it certainly puts people that are in stress positions with their mortgage today in a better position to be able to handle their obligation, to stay in that home perhaps to get back on track if they had been knocked off course financially. Additionally, provide some confidence for the market in terms of bringing some buyers back into the market and help them with some of the overall turnover levels and taking some of this stress inventory of the table. So we have always thought that the number could be as deep as a 19% ultimate decline. So that was within our realm of planning as we went into 2011. The things moved up maybe a point, but it's been really will them in what the range we expected ultimately play through in 2011.

Joanne Smith - Scotia Capital Inc.

Okay. I guess I just want to think about the investment properties that may be still hanging around there. I'm just thinking maybe something's going to say, my goodness that's now gone down another 5%. I'm just going to walk away from it.

Kevin Schneider

I don't have the exact numbers in front of me right now. But my expectation is that most of that investment property has already hit the delinquency bucket and is effectively being reserved for. The other thing I would add to it, and this is an important point to this discussion, is in this business historically, what you see is you got year-over-year books of business coming on. When you put those new books of business on, there's a natural expectation that in the first 18 to 24 months, you're going to be hitting some of the peak delinquency development for those new books. Our last -- our 2009, 2010 and experienced in our 2011 books of business is simply not throwing off the traditional level of delinquencies that one would expect, even in a period where you got this home price decline and lousy employment going on. I'll just throw this out for you. Our 2010 book has maybe 34 delinquencies in it. Our 2009 book, I want to say it's under 140. And so -- and maybe we added 3 or 4 delinquencies in the 2010 book this quarter. But when you think about that in the context of what's going on in this market, I think we're starting to see our credit turn, and I think that's a positive sign.

Joanne Smith - Scotia Capital Inc.

That's great. That's very good color. Also, Mike or Pat, I have a question. It’s kind of a comment that wasn't necessarily highlighted. but when you talk about the securities that were available to support the book of U.S. MI, that are outside the holding company in the [indiscernible], are there any regulatory approvals that you would see if you were to take some securities from MI Canada and use those to support losses?

Michael Fraizer

This is Mike. I'll look at it this way. Anytime you're in a regulatory process, there's certain set standards. Certainly, Canadian securities are viewed quite positively but there are other securities as well. So any of those of go through either a set of rules or a set of evaluation and that's the standard approach.

Joanne Smith - Scotia Capital Inc.

So there wouldn't be like specific approval to remove certain securities that are supporting liabilities up in Canada and bring them to the U.S. MI?

Michael Fraizer

I'm not getting into details of any structural approach fundamentally. But I look at securities that we hold, we have certainly evaluated ones that are, I'll say sensible for potential strategies such as I outlined though no decisions had been made on those. So we've already given that plenty of thought.

Joanne Smith - Scotia Capital Inc.

Okay.

Operator

Ladies and gentlemen, this concludes Genworth Financial's First Quarter 2011 Earnings Conference Call. Thank you for your participation. At this time, the call will end.

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