Genworth Financial, Inc. (GNW) Q2 2011 Earnings Report, Transcript and Summary

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

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

I'd like to make 5 key points this morning. First, U.S. residential real estate and mortgage markets remain very challenging, and led to the action we took this quarter to strengthen USMI reserves and provide capital support for new business. That said, the USMI business does not and will not have an unlimited call on the capital of the enterprise. Second, we are making sound progress in our Retirement and Protection and International segments, as well as in our investment portfolio. I'll leave it to Marty to cover some specifics in these areas. Third, we understand that with our shares trading at a significant discount to book value, share repurchase is a compelling use of capital. There are however, certain constraints and consideration here, including rating agencies, maintaining risk buffers in financial flexibility, retiring debt and assessing medium- and long-term value prospects of the individual businesses. We believe these considerations can be addressed while at the same time, working actively to accelerate plans to return capital to shareholders and enhance shareholder value, and I'll update our perspectives on the timeframe for this. Fourth, we have a number of material efforts underway to optimize our business mix and capital deployment, and these contributed to our decision to use a portion of our Canadian shares to support USMI. And fifth, we recognize that the characteristics of our Life Insurance and Wealth Management business, as compared with our MI businesses, may appeal to different groups of investors, and are making progress on steps to facilitate the option of separating the company, along these lines, if and when it makes sense to do so. Let me provide some additional perspective and details on several of these points. Let's start with USMI. We believe the USMI industry has strong future potential and continue to advocate actively on that front in public policy circles. We did see several market trends deteriorate in the quarter, while also seeing new delinquencies fall. And we remain focused on addressing USMI risk issues directly and actively. Now trends like the ones we experienced could continue, so it is important to emphasize that the USMI business does not have an unlimited call on the capital of the enterprise. I understand the question regarding the rationale behind our decision to use $375 million of stock we own in our Canadian subsidiary to provide statutory capital support to USMI to facilitate the continued writing of new business. The idea of using these shares is not new. We previewed the potential use of these shares with rating agencies and regulators, and discussed it with investors on our first quarter earnings call and in other investor meetings. Let me summarize the assessment that led to this decision, then turn and address how we approach limiting our exposure to this business. First, in USMI, it is important to distinguish between business originated before and after the middle of 2008, when underwriting and pricing changed substantially. We like the quality and expected returns of the books of business originated since mid-2008, which have already generated more than $200 million of premium. These books are expected to generate pretax income of over $430 million over their life with a return on equity in excess of 25%, with the performance metrics of these books tracking to that return level. As we look to the future, we believe this type of opportunity can continue. And therefore, there is real option value in writing new business. And there are several key regulatory and legislative issues under debate, the resolution of which could materially increase the size of the private mortgage insurance market. I'd note 3 areas, specifically. First, the administration has expressed its intent to reduce the role of the FHA in the origination market. Meanwhile, we have seen a modest but steady increase in MI purchase penetration from 5.3% in first quarter 2010 to 8.2% in second quarter of 2011. Next, the role of MI in what constitutes a qualified residential mortgage or so-called QRM would also have a significant impact on the future size of the MI market. We have been an active participant in the public policy debate on the role of low down payment lending in the recovery and mortgage finance more broadly. Finally, the administration is reevaluating the role of the GSEs or some form of replacements in backing the country's mortgage debt. This, along with other factors, could impact both the size of our market and the potential for industry consolidation through the cycle. So although we have been granted risk capital flexibility in the form of regulatory waivers above the 25:1 risk to capital level to keep writing new business, second quarter losses, coupled with reserve actions would have increased USMI's ratios to a level that may have hindered our ability to continue writing profitable new business in the absence of the capital support action using a portion of MIC shares. That said, we considered key factors before we decided to transfer a portion of the shares we own in MIC to USMI. First, this capital contribution was not about sufficiency of claims paying resources or liquidity, and we analyzed both carefully. In fact, even in extreme stress scenarios, down from the current environment, USMI's existing capital base and loss reserves maintain sufficient claims-paying capability. And second, we concluded this approach was better than the outcome from the financial analysis of the company-initiated runoff. Given the recurring premium stream and the value on persistency of higher return new business, we believe that USMI has significant residual value even in stress scenarios. So why did we use MIC shares? There were 3 considerations here. First, we had no intent to monetize these shares. Next, we could receive full statutory credit for the shares transferred, and finally, our multiyear analysis demonstrated that in those same extreme stress scenarios, USMI's existing capital base and loss reserves maintain sufficient claims-paying capability, including an adequate buffer in front of the contributed MIC shares. So using MIC shares enables us to continue to hold the majority position in MI Canada on a consolidated basis. This decision was carefully vetted by management and the board. We did consider a range of alternatives and concluded our best strategy at this time is to support the future potential of this business through the use of existing nonlife company assets while preserving holding company cash, which includes a prudent buffer for debt obligations as well as other expenses. Now let's turn to how we approach limiting exposure to USMI. It has been frustrating for all of us to take multiple increases to reserves while continuing to incur operating losses. Incorporating both internal and external analysis, including stress scenario assessment, we certainly feel the range of loss risk has been narrowed, though certainly not eliminated. Therefore, any additional capital support for USMI would have to be predicated on multiple factors and the screens are very demanding. First, is being on track towards executing other material capital reallocation transactions, which can support redeployment of capital for the benefit of shareholders, including the maintenance of prudent risk buffers. Second, additional granular analysis of the risk, value and return considerations I outlined earlier, along with a fresh assessment of all alternatives. These alternatives could include use of sidecars or new co-entities, subject to investor interest and regulatory considerations, as well as alternatives considered before. Third, improved visibility on the public policy front and finally, assessment of actions by competitors, along with the current views of GSEs and regulators. Let me now provide some perspectives on the next key area, the topic of share repurchases. We believe repurchasing shares at our current valuation is a compelling investment. At the same time, as I stated at the outset, there are certain considerations we factor into all of our capital allocation decisions. These include maintaining our ratings, maintaining appropriate risk buffers and financial flexibility and assessing medium and long-term value prospects for individual businesses. In addition, we intend to reduce our leverage ratio from its current 24% level over time to provide more flexibility in managing our business portfolio. But I believe these considerations can be addressed, while at the same time, working to accelerate plans to return capital to shareholders. Specifically my goal and that of the board is to accelerate the timeframe for returning capital to shareholders from the 2013, 2014 timeframe that we discussed previously with investors into 2012, while keeping an eye on the overall markets and financial flexibility that benefits all debt and equity holders. Now let me turn to my fourth point, an update on our various efforts we have underway to manage our business portfolio and optimize capital deployment with the goal of accelerating redeployment to improve shareholder value. We're pursuing initiatives on 3 fronts. First, we're targeting the Medicare Supplement sale closing for early in the fourth quarter, which frees up $240 million of capital. Marty will address this further. Second, we have substantially refined our strategy to monetize a portion, or all, of certain life insurance blocks, starting in the second half of 2011 and continuing through 2012 to reduce earnings volatility and/or free lower return capital redeployment. This effort has now moved past the conceptual phase to a negotiation mode. We are targeting a capital impact of at least several hundred million dollars from initial transactions. Naturally, market conditions can influence the demand, timing and execution of such transactions. Third, we provided investors an interim update on our thinking about the business portfolio in February, and you saw the actions we took to exit variable annuities and Medicare Supplement insurance. This review of our business portfolio has remained very active over the past several months. In this connection, although we desire to maintain control positions in our operating businesses in general, we have been evaluating changing ownership levels in some of them to enable material redeployment of capital that would enhance shareholder value. This could include asset sales. As I mentioned before, we, of course, keep a sharp eye on the same key factors of risk buffers, ratings considerations and valuations, along with book value per share accretion and EPS considerations in such evaluations. Because we are in various stages of these efforts, it would not be appropriate to say any more at this time. For now, I'll just say that our management team and board, along with our advisers, have been devoting a considerable amount of time to this process and all bring a sense of urgency to the efforts. As we work through the initiatives in these areas, I would also note our sales have been fairly strong in the U.S. life businesses and a bit light internationally, reflecting market dynamics, both of which influence capital generation and consumption. We will take these factors into account and work to adjust dividend and sales levels accordingly to optimize how and where we allocate capital. I'll turn now to my fifth and final point, whether it makes sense to separate the company into 2 components. We recognize that this could be a desirable way to create shareholder value over time. We have explained why we do not believe it is a strategy to execute in the near term, given financial synergies, capital structure considerations, market environment, valuation levels and the fact that our businesses are in various stages of recovery. However, we have also stated that we would continue to evaluate a split as such circumstances change. Thus, to enable execution of this option in the future, we have taken, nor continued to take, several preparatory steps including planning for a realignment of our businesses from an operating standpoint during 2011, adjusting our debt levels downward over time and transitioning certain business platforms towards more standalone capital structures. We're making sound progress on all these fronts. In summary, we recognize that the current market discount applied to Genworth dramatically undervalues our underlying business platforms and their potential. We fully intend to unlock that value and potential through a combination of effective execution of current business plans, realistic assessment of the current and future prospects of our business portfolio, thoughtful analysis of risks and opportunities, optimizing capital deployment and liquidity, supporting our holding company and taking prompt and appropriate actions to substantially enhance the value of our business portfolio. Now let me turn it over to Marty. Marty?

Thanks, Mike, and good morning. I have 3 key areas I want to discuss, beginning with segment results in the quarter, followed by our investment portfolio and then our overall capital and liquidity plans. I'll start with USMI and first, I want to frame the continued weakness in the U.S. residential real estate market. The unemployment rate was 9.2% at the end of June and the recovery of the job market continues to be slow. Excess housing stock remains high for a number of reasons and the FHFA had reported a home price decline through last December of 20%, a revision of their earlier estimate of 15%. We still believe the decline will continue another 4 to 5 points extending into 2012, so the peak to trough decline will be about 24%. With these economic factors as a backdrop, let's review the impact on USMI and discuss the reserve strengthening. Our total primary delinquencies declined 2% sequentially, with new delinquencies down 18% year-over-year and 11%, sequentially. However, the shifts in the payment status or aging have accelerated, while our cure rate, overall, has declined 5 points from the first quarter. Delinquencies with greater than 12 missed payments grew 3 points from last quarter to 45% of the total and grew 13 points from a year ago. This is a symptom of a slower foreclosure to claim process by servicers. Lower cures and modifications outside of HAMP are impacting delinquencies with 4 to 11 missed payments due to the worsening economic conditions and continued servicer insurance related to process, systems and outside scrutiny. The cure rate in this category declined 2 points from first quarter. We continue to see earlier stage delinquencies moving to late stage more rapidly, possibly from servicers which are dual-processing modifications and foreclosures as we began to see in the first quarter. Given the combination of these factors, we recorded the $300 million strengthening this quarter. $100 million of this related to our experience of these worsening trends and $200 million was in anticipation of further declines in the U.S. housing market and in cure rates. The results of our reserve evaluation this quarter were different from those in the fourth quarter. In the fourth quarter, we addressed reserves for trends we were seeing in the late stage delinquencies. The current reserve strengthening addressed the 2 trends we saw this quarter, which were lower borrower self-cures and a higher rate of early-stage delinquencies going to late stage. These reserve actions in total have addressed the worsening trend across our entire portfolio. Our average flow reserve per delinquency is now $29,200, up from $25,400 in the first quarter and up $9,700 from a year ago. This brings our total amount reserve for flow delinquencies up to 58% of risk in force from 48% at year end, with 71% reserved in the greater-than-12 missed payment delinquency category and 60% reserved in the 4 to 11 missed payment category. Our loss mitigation savings for the quarter were $130 million, bringing the year-to-date total to $252 million. We expect these levels to decline a bit in the second half of the year, but are in track to make full year savings of $400 million to $500 million. I'd stress that we see significant differences in performance by servicer, which is impacting our modifications, cures and foreclosures to claim process in many cases. Looking ahead, our share remains at 15% and new business profitability is strong with expected ROEs north of 20%. The risk in force on business from second half of 2008 through the current quarter, which represents almost 20% of our risk in force, is performing well. Including the capital infusion, the estimated consolidated risk to capital ratio for the quarter is 25:1. We continue to look for additional capital flexibility, such as stack entities and reinsurance structures. Moving now to the International segment, underlying performance for the quarter was solid. There were some tax adjustments in both the prior year and this quarter, increasing tax expense resulting in higher tax impact of $22 million. Looking through the tax adjustments, our pretax segment earnings increased by 11%, driven mostly by good Lifestyle Protection performance. Capital ratios across all platforms remain strong, and we are on track to meet our dividend targets for the year. Turning to performance by business. In Canada, operating earnings for the quarter were down 38% from the prior year, driven by an unfavorable U.S. tax adjustment of $12 million and interest expense related to local debt issuances to optimize our capital structure. The underlying performance of this business remains strong and so loss ratio declined to 33%, a 5 point sequential decline, driven by improvements primarily in Alberta, as well as continued focus on loss mitigation. While the revenue line in Canada will remain pressured due to the maturities of the large 2007 and 2008 books, our share is up. In a stable economic and housing market environment, performance is on track to continue to generate significant capital. In Australia, operating earnings were down 22%, reflecting a $10 million favorable tax adjustment in the prior year, as well as increased delinquencies. The loss ratio increased 6 points over the prior year to 48%, reflecting a slow recovery in Queensland from the flooding earlier in the year, as well as the combined impacts of higher interest rates, increased living costs and the strong Australia dollar pressuring certain consumers and small business owners. As a result, our loss ratio estimates for the second half of the year are in the high 40s to low 50s. From a capital perspective, we completed a Tier 2 debt issuance of $140 million in Aussie dollars, which is part of our capital plan to reduce the affiliate reinsurance and optimize our capital structure. We expect solid in force performance along with lower levels of new insurance written to keep driving excess capital generation in this business. Moving to Retirement Protection, operating earnings were up significantly. The Life Insurance business had a favorable mortality results of $6 million and favorable investment income of $6 million. Investment results benefited from favorable limited partnership results and prepayments fees on bond calls. Also, to improve margins, we selectively repurchased notes, backing excess reserve funding obligations at a discount for an $11 million gain. Profits from these sales over the last year along with improved persistency, together contributed $9 million this quarter. The long-term care business experienced a challenging quarter with performance hurt by increased incidence of claims in the older blocks of business. Overall, the loss ratio was at the high end of our expectations at 70%. This follows the first quarter ratio of 65% near the midpoint of our expected range. I do want to note that our loss ratios on the newer generation business continued to do well, 50% this quarter. We're closely monitoring claims development on the old blocks to see if this situation continues beyond this quarter or if claims return to normal levels. Let's shift now from quarterly results to discuss the initiatives in RMP [ph] for the rest of this year and next. These initiatives fall into Q3 categories. First, narrowing our breadth of business to concentrate on our primary businesses; second, improving in force margins and third, freeing up capital. Over the last 2 quarters, we have taken significant steps in these areas. Most notably, we exited the variable annuity business and are now in the process of closing the sale for our Medicare Supplement business. The VA exit will reduce our statutory capital consumption this year by approximately $60 million and the Medicare Supplement sale, which is expected to close early in the fourth quarter, should generate $240 million of capital for redeployment. At the same time, we've seen sales expand in Life Insurance, long-term care and fixed annuities, but are actively managing the volume, capital consumption and profitability of this new business. For example, in August, we will introduce an updated individual long-term care product with price increases in the range of 9% to 20%. Depending on the risk and benefit profile, we will maintain pricing and capital discipline in all these lines, so second-half sales may slow from the first half. In addition to pricing, we also use our reinsurance programs to achieve targeted levels of capital utilization and returns. Regarding our efforts to improve in force margins, one example is the action we took to file an 18% price increase on the majority of the old long-term care blocks, which should result in an estimated $60 million to $70 million in additional annual premium. With respect to freeing up capital, we are very focused on evaluating a series of life block transactions and estimate these transactions to occur later this year and into 2012. Moving to investments, the global portfolio is performing well. The core yields are up to 4.7% in the quarter as alternative asset valuations are improving and we are optimizing cash balances and product portfolio funding levels. Impairments were modest in the quarter and half of the level that we reported one year ago, reflecting the derisking of the investment portfolio over the last several quarters. Let's now look at the holding company and the progress that we've made on our goals through the second quarter. At the holding company level, our capital and liquidity plans are focused on managing across 4 goals: First, maintaining suitable financial flexibility across the reasonable range of economic and business conditions. We are mindful of the potential risks to the economy not just in the U.S., but in all of the markets where we operate. Our capital plans are meant to protect our operating businesses and the company even in challenging environments. Second, holding cash balances of at least 2x our annual debt service expense. This creates risk buffers against environmental and capital market stresses to ensure that we have liquidity to meet all our debt obligations and also improves our ratings profile. Third, managing leverage to provide flexibility over various cycles with a long-term goal of between 22% and 24%. This is a revision of our former target of 20% at the end of 2012. We believe this new goal provides additional capital flexibility while keeping us well within rating agency thresholds for our ratings. Fourth, creating a recurring stream of dividends in our businesses that can support our first 3 goals and create shareholder value over time. At the end of the second quarter, the holding company held cash and liquid securities of $667 million, about $150 million above our cash buffer target, reflecting payment of $548 million of debt maturing in the quarter. With the payment of this debt, we reduced leverage by 2 points net of new debt. Our next maturity of about $220 million is in June 2012, and we have no debt maturing in 2013. Turning to dividends to our holding company. As we outlined at Investor Day, the majority of our 2011 dividends will come from our international businesses. We estimate that approximately $350 million will come this year from those businesses. Additionally, we plan to dividend up to the holding company and the majority of our Medicare Supplement sale proceeds. This may occur in a couple of steps. However, we do expect a large dividend late this year is subject to regulatory approval. We will decide more specifically how to redeploy those proceeds as we make headway on other initiatives to free up and generate capital. Finally, on the people front, I'm happy to report that Georgette Nicholas, who many of our investors know from her role within USMI, will be leading our Investor Relations team. She will be transitioning out of her current role to IR in mid-September. In the meantime, Kelly Groh will serve us our Investor Relations point. Kelly has many years of experience at Genworth in a variety of senior, financial and investment roles. In closing, we are on track with most of our business and investment goals. However, we are very disappointed with our performance in USMI and are extremely focused on addressing this performance and the concerns of investors. With that, I'd like to open it up for questions.

[Operator Instructions] Our first question comes from Donna Halverstadt with Goldman Sachs.

I suspect I won't get answers for the questions I'd really like to ask so I'm going to stick with ones that I think are answerable in this call. The first one I want to ask about is on the life side. One of the rating agencies put your life OPCOs on negative watch. And if your life OPCO ratings were to fall out of the A category into the BBB category, whether that be at one or several rating agencies, what would the implications be for sales trends in the life products that you're now focusing on?

Pat, do you want to take that?

Sure. One of the -- I would comment that one of the rating agencies did put the life companies on credit watch and simply, I would add qualitatively, that, that was something that they indicated they would do should there be some additional reserves or negative experience in U.S. mortgage insurance, and that is for the purpose of doing a more thorough review of the life operations. I'm feeling very good about the capital positions in the life companies, the earnings trends and the performance of the business in particular in terms of market shares and the sales that we've seen recently. I would have to say that there would be impacts relating to a downgrade on our Life Insurance operations. I think that distributors would take into account the strong ratings we enjoy from the other rating agencies. When we look at that scenario, we reflect back on the experience that we had a couple of years ago where strong distributor loyalty and a offset [ph] of close collaboration with independent and carrier distributors resulted in a situation where we've maintained those relationships and built them back up over time. I think it's also important in considering those distribution relationships that we continue to enjoy strong A ratings from both Moody's and S&P. In fact, in -- I'll say the recent reviews, S&P did review on our -- from the holding company, did not see a need to review the life companies in the context of the current situation. And Moody's has recently, has following the first quarter, took a very detailed look at our operations and from the ratings of both the holding company and the life companies. And I think that will factor strongly into the decision. Does that help?

Yes. From the MI side, in setting your USMI reserves, is there anything that you can do with respect to processes or procedures or otherwise that would reduce your reserve sensitivity to deviations and actual, relative to assumptions on things like cures and modifications and recessions and denials, et cetera?

Donna, this is Kevin. I think -- a couple of ways I think about that. Number one is it's based on our actual observed experience and the future trends. And so, what you saw in the quarter -- one of the things we did this quarter, as we did in the fourth quarter was we took both a reserve strengthening from our existing experience that we saw and then we further -- and of $100 million and we further strengthened reserves an additional $200 million to account for where we thought cure trends might deteriorate to. So we tried to do that in the fourth quarter, we've taken another track at it this quarter, we think we've narrowed what the additional volatility might be. I can't tell you we got it all, but we've done that. Additionally, we've really availed ourselves of a lot of other third-party views into their overall assessment of our experience and our reserve levels. We take into account both internal and external views. We've worked with the regulators, they've done analysis of our reserve levels. The GSEs have undertaken their own and we work closely with them and certainly use independent actuaries as well. So we're trying to take as open of a look at this as possible. We think that makes a lot of sense and we're certainly not happy with that volatility, but it's operating in an environment that continues to be pretty volatile as well.

Okay. And then, the last question's 2-part and then I'll get back in the queue. But it's on debt and capital. With respect to the noncash intercompany transactions you're using to create the capital in USMI, whether it's with other mix shares or other financial houses that you have outside of the life co, can you quantify how much more capital you can create in USMI through these types of maneuvers before you have to pull some other lever? That's the capital question. And then on the debt side, if you get to the point where you do split the companies, would you keep all the existing debt at what I'll call, main co? Or would you shift some of it over to the MI company?

Donna, this is Mike. First, you're sort of on a when and how question regarding use of shares, additional support for USMI. I want to direct you back to the if question because that's why I want to be very pointed in my remarks that although we like the industry, we think it has good potential, the USMI business does not have an unlimited call on the capital of the enterprise. So a lot would have to happen first. And that's why we sort of laid out 4 -- what I would call sort of a 4-part framework and it's a challenging one to really take a hard look. First, as I said we had to be on -- would have to be on track, executing other material capital reallocation transactions that could support redeployment of capital for shareholders, and that includes maintaining good risk buffers. We would do a lot of granular analysis because the environments have changed. They're dynamic. And that would have to hit all the risk factors, value considerations, return considerations and take a real hard look at alternatives. We worked hard looking at alternatives, too. We talked on prior calls about new co-entities, stack entities as an example. We're out -- and one of the first ones going back even in the 2009 timeframe, looking at sidecars, which we literally structured them and took them around, and we didn't see a lot of interest then and maybe now as people have seen these new books season in, there will be renewed interest in them. And you can see there are other MIs who have taken a look at alternatives, too. Republic mentioned that they were working on new co-entities and we applaud that. In fact, as an industry, the mortgage insurance industry is working on that. So we hope we altogether can push that forward, and that can also be a way to attract new capital to the industries to support new books. If I -- then you have to have certainly a better visibility, to me, on the public policy front. There's a lot of things going on in Washington on housing financing reform. And frankly, I know there's a lot of focus on the primary issue going on 2 hours up the road here with the debt ceiling, but every comment talks about, well, we have to get the housing industry back to help the employment situation and the economy. Well, that takes a focused effort from the executive branch and it takes a focused effort within Congress to narrow the range of many programs that have been put out there and get on a track to take uncertainty out of housing finance and out of loan servicing practices, because uncertainty doesn't help anybody. And we're pushing that, and I think others need to push that as well. And finally, we have to assess what are the actions of competitors along with the current use of GSEs and regulators. You could see some consolidation occur. So even if you would see consolidation, that's another type of dynamic or alternative to consider as well. And there's always the alternative of the company-initiated and sponsored runoff scenarios. So for me, you have to go through all of those types of screens first, and that informs your view of what steps you might take. But I think I've been pretty clear on capital allocation priorities and what we want to do to keep the holding company strong.

Great. And the debt question?

On the debt question, it's sort of speculative basically at this point. This isn't new ground in business. In other words, the separation of companies, whether you have to go through a thoughtful process, structuring all types of cons in betting [ph]. So there's no reason to me to go speculate on that front. I will bring you back to the point however, that you'd see us at a sort of 24% leverage ratio, bringing that gradually down over time, aids, in that strategy if you want to go that way. We did do a lot of work, as I said, on a number of fronts, including work with advisers and we're always talking to the agencies and hence, updated our view that we could be in that 22%, 24% range that Marty laid out, and be supportive of the strategic alternatives that I outlined. So that's why you saw that move from what we talked about in general in the 20%, 21% range and updated that to the 22% to 24%. And we think that still let's you have the flexibilities you need.

Our next question comes from Darin Arita with Deutsche Bank.

First question is on the U.S. Mortgage Insurance side. Mike, you mentioned that it does not have an unlimited capital call on the enterprise and I was glad to hear that, but I was wondering if you could quantify how much additional capital would you be willing to move into the U.S. Mortgage Insurance subs?

If I could hit a replay button on what I just said to Donna, I would, because that's the issue, in my mind. To me, you have to get through all of the if screens, the 4 points that I walked through, and let that inform your view. I will say, for what we've already done, one, we think we've created a very good quarter to support new business. And we've taken an important step on that, but we want to evaluate all of the other points in a thoughtful manner and let that inform in any future decision.

I guess, I'm just thinking here it would give a lot of the -- and equity investors and I think, people on the credit side, too, much more comfort if we could draw a line in the sand somehow here and understand there's a lot of moving dynamics there in the decision process and it's not easy. But if there's any way, if not now, at some point, to just say this is the furthest we'll go, I think that could be helpful.

Fair point, I understand and respect that point. I've tried to be quite specific in how you have to look at these things and there is a whole host of alternatives here, to me, before you even approach the thought of additional capital support that have to be vetted. And we've been doing a lot of work, as I've said, elsewhere in the portfolio. So that's another piece of the puzzle here, but I respect the point and I tried to be as declarative directionally as I think I can right now. Let me be very clear though, you raised the question on debt. Our focus, as Marty laid out, at the holding company is to have substantial buffers with 2x coverage. You can see how we paid down debt. We've effectively pre-funded the 222 coming next year. We think very -- everyday, we think about protecting debt holders as how we'd deal with our other constituents, policy holders, investors. And I think if you think about all the different areas I touched, I'm certainly trying to send that as a strong message to everybody.

All right. And just on your comments about share buybacks, Mike. I was wondering to what extent you've expressed your plans to the rating agencies on resuming share repurchases in 2012 rather than the previous plan of 2013, 2014?

Well, first, let's put it in context. You always start, as I said, looking at risk environments because risk environments change. They change, as Marty said, in the U.S., they change globally and we start there, and you have to make sure you have financial flexibility for different risk environments. And there's certainly -- we all know there's a number of uncertainties in the world out there. With that informing your view, as I said, you go right at your ratings and you always talk to the agencies about wanting to maintain the types of buffers, getting their inputs. Every rating agency has talked on an industry basis about all of the commentary repurchases, when are they appropriate, when wouldn't it make sense, et cetera. But as we've talked about reshaping our business portfolio, that creates, certainly, an important contextual element here. So absolutely, that's a consultative point there. So we will bring all those forward in our regular and ongoing updates of the agencies, but you start with the risks and the ratings piece. But when you look at the things we've been looking at and it's more than looking, working on, with substantial effort underway, which just absorbs most of my time, we see this element of being able to maintain prudent approaches and reallocate capital.

Our next question comes from Andrew Kligerman with UBS.

Maybe just following on to Darin's question about the buybacks, Mike. I know you can't tell us what you're going to do, but maybe just probabilistically, what do you think the chances are of a repurchase are next year? And at what point will that decision in 2012 be? Will it be early in the year, will it be late in the year?

We'll put it this way. We would tend not to talk as specifically as we're talking about this whole host of points I did and sort of particularly, if we think of points 3, 4 and 5 that I went through, unless you have done a lot of work and a lot of effort underway, we're making progress on those efforts and I'll leave it at that. I'm not going to speculate on the timing, but I certainly gave what I think is a very clear direction. Now some people asked us about, what were you doing in -- looking at the Med Sup business and we announced the transaction when we had something to announce. And in general, I think there are a lot of constituencies and some complexities in any repositioning or transaction and it's best to work through those before you have a public discussion, and I think that's a good rule to live by.

Okay. All right. So I'm just going to take that because you're doing a lot of work on it, then there's a good chance. So with regard to Australia. So the loss ratio was 40% in '10, 48% this quarter, and I think I heard Marty mention the expectation is that it now goes to the high 40s, low 50s. With less than 0.6% of your insured loans in delinquency, what gives you comfort or what gives you a lack of comfort that these loss ratios won't move up sharply in the next year or 2?

Let me hand that over to Jerome Upton, okay?

I think you need to -- if I could offer a way to think about this is some of the things you're feeling in the loss ratio is lingering impacts of the Queensland flood, there's been a slow recovery there. And we all know there's a government stimulus coming in that's going to help that recovery process. It's just going to take some time to come back. So that's the first thing that I would tell you. And then also, you have to think about the insurance in force and the quality of the book that we have there. And I would encourage you to look at the change or the movement, and not necessarily where we ended up from a delinquency rate perspective, that is indeed low, but you need to look at the change. And then when you think about the quality of that book, it's very good and there's very solid levels of embedded HPA there. And when we underwrite product in that market, we use interest rate buffers and we vary those buffers based on market conditions, and we raise the buffers for the 2009 and 2010 block. And then finally, I would just offer you that we continue to partner very closely with our customers, our lenders, to mitigate losses in that area. So when you think about all of that, you got the Queensland area that has been probably the predominant pressure in the block, that's going to come back over time with the stimulus activity, the recovery of mining and agriculture and then the quality of the business. And finally, I'd just say that from a market fundamental perspective, the market remains strong. There are some unique characteristics there that make it strong with respect to the supply-demand. There's more demand in that market than there is supply, about 180,000 units. So I hope that helps.

Definitely. And then just with regard to the U.S. Mortgage Insurance area, just an interest -- the stat that interested me is the average paid claim is about 41,000. And now the reserves per delinquency have been strengthened to 29,000. But the question is, is that enough? I mean, cure rates continue to decline. Why would you be comfortable that, that's enough?

Kevin, you want to take that please?

Andrew, we -- one way you could think about this, now you just take it to the complete extreme. You take it to the complete extreme and you say, what I want is to reserve this whole thing in 100%. And the reality is, to do that would be totally inappropriate and inconsistent with the actual observed experience we've seen. If I -- we added some additional -- just to give you some context, we added some additional, I think, positive transparency in our new quarterly financial supplement. And if you look to Page 46 in there, and everybody else on the phone as well, there is a piece in there that talks about the composition of the cures that are going on in our book of business. If you go back and reference that, and what you see is we continue to have curers at all levels of those various late payment stages: the less than 3, the 4 to 11, and even in and most importantly, the above 12, the 12-plus down payments. So I think we've taken a substantial move, and I think we'd probably have the most conservative reserve levels now in the industry if you look at it with a book of business that I think was probably one of the most conservative books of business done. And now we're going to wait and continue to watch the experience play out. If you go back and say, look at the June 2009 population of -- excuse me, of 12-plus loans, 25% of those that were 12-plus delinquent back in June of 2009 have already cured. So you continue to have cure experience there, our loss mitigation efforts have continued [ph] to help it, but I'm with you. We're not satisfied that we've continued to have erosion here, but we got a servicer industry right now that's pretty clogged up and isn't functioning correctly. It isn't functioning properly. And we're hoping that's going to clear up as we get through some of these servicer settlements. And again, we'll watch it closely. We took another big -- we took a big strengthening this quarter. We took -- we went beyond it, and hope that additional level of conservatism based upon the trends that we think could continue to play out will get us through the balance of this thing.

Got it. And then my last question kind of just revolves around the potential structural changes in the company. I always think back to this old one Buffett comment about when you've got a great management and a horrible company, the horrible company's reputation wins out. And so what we've seen is old Republic. Yesterday, we saw over the wires that they're not going to put another dime with capital into the USMI business, just heard Marty comment that you're going to have to monitor the long-term care loss ratio, which has now inched up past 70%. So you've got a lot of tough businesses, Mike. I know you can't say what you are going to do. Maybe just tell us how much you love the businesses. Do you love these businesses? Is it something that you don't want to let go of? What are you thinking? I mean, USMI has got some real challenges as does as LTCI, and potentially, other businesses.

You've asked a number of questions there.

I'm sorry. I'll just -- I'll keep it at how much do you like USMI? How much do you like LTCI?

Let me -- no, I'm going to take all of your various questions and answer them the way I want. Okay. Now you asked about old Republic and as I -- I brought that up because I think the new co concept is good for the industry. And it's one we want to support as an industry as well as our individual efforts. If you want to go into it, and I'll let Kevin go into. There are some differences certainly, between our circumstance and old Republic's when you look at book of business, level of new business and share. There's a lot of differences there and we can delve into that if that's helpful, so I'll give you a follow-up on that one. Let's go back to the point is, I think, anytime you're working through a business portfolio, you have to realistically assess a number of factors. I mean, we have lots of constituencies as you can imagine. And we have investors, we have bondholders, we have policyholders, we have regulators and rating agencies and employees, the list goes on. You have to look at their markets realistically, what you think they are, as well as the current risks and opportunities in them. And you have to look at where are you concentrating or are you putting your capital enough. So you're varied deep and good at the right number of things because if you're spread out too much, that can be certainly a negative if you're managing a business portfolio that has more than one line. And yes, you can get financial synergies' diversification benefits, I understand that. But we've been taking a real hard look at our businesses and I break them down on 2 fronts. If you look at sort of those that are more protection-over-time-oriented and you saw the calls made on a number of fronts, if I rewind over time and go back several years -- we got out of the Small Group business. We got out of Institutional. Well, we sold the Small Group business, frankly, and at a very attractive valuation. We got -- to put Institutional in runoff, sold Med Supp, again, at a very attractive valuation. VA in the runoff with the capital benefit, so -- and really honed down on fewer things in that area and took actions whether it's LTC new business pricing actions or book pricing actions, actions we took to price in Life Insurance. We took a whole set of pricing and contract actions in Lifestyle Protection, all of which were to say, with where you remain, do you have good margins? Can you manage the risk and do just that? If you look at the MI side of the house, we work through -- we talked about the USMI market, both how we see its potential and what we think remains as the value in the business, as well as the International platforms. But I think we will not hesitate to reallocate capital to balance returns, where we get better returns for shareholders, balance risk, specifically, and do that on a fairly clinical basis. So this isn't about a motion. It's not about just saying, I've got to be in a business because I've always been in a business, traditionally. It's about a cold hard evaluation, and we do that on an ongoing basis. It's not just a project that happens periodically. I think that's a fairly dynamic process that a management team and a board have to go through, and hence, my comments on our engagement in doing just that.

So right now, do these businesses seem pretty compelling? Is there a fairly good chance that we could see some material changes into next year?

Andrew, I think my comments were pretty specific that we're working on things that involve material redeployment of capital and the opportunity for that. But you're going to have to see some of those as they unfold and I've -- in response to some other questions I've given my thinking around that.

Our next question comes from Steven Schwartz with Raymond James. Steven Schwartz - Raymond James & Associates, Inc.: I've got 3. Kind of, I guess, in follow-up to a couple of the points that we just talked about with Andrew, first and foremost, I think. The potential change in the company structure, splitting out the R&P business is, I gather from all of the MIs. Didn't you address this? I think it was in the first quarter or the fourth quarter, Mike, with regards to the tax situation and how it would be very unattractive?

Well, I guess, I'd think about it this way. One of my intents in addressing the point is people continue to ask you about it. It's a natural question. I think it's -- particularly, as we all went through the financial crisis period, the associated recession and that, investors, companies, everyone took a hard look at businesses you're in and compatibility of businesses that you're in or in synergies. So that is an ongoing dialogue that you tend to have and certainly, with the investor community. I pointed out that there are important tax considerations that -- I look at it this way as, strategies have to lead the way and then you look at tax implications. You don't let taxes drive the strategy. So it's one element, and we wanted to be transparent on that element. But certain of the structuring things that I mentioned and alignments that we're getting completed in 2011, which have alignment in commercial benefits, also bring with them tax opportunities as well. So that's why I had to point the difference between immediate or near term versus things that can unfold that you should prepare for, because the balance of all your considerations can intersect and then lead you to the ultimate decision. But, listen, I want investors to know that we think about that actively every day and we don't -- we're not sitting here with our feet on the ground on that front, and that we're thoughtfully letting the strategic elements drive the way while we think about the other economic aspects and take preparatory steps. Steven Schwartz - Raymond James & Associates, Inc.: Okay. And then with reference to the actions that old Republic you took yesterday, I mean, I -- I guess, I'm not getting why you think what you did with the MIC business is -- with the MIC shares, excuse me, is better than what old Republic is trying to do, the runoff the old business, put capital in the new business, unless your thought pattern really is there's just no way the regulators would approve this...

Well, first, let me turn it over to Kevin to talk specifically about iterations around that, and I'll pick up from there.

Steven, we -- as Mike referred to earlier, we like the concept of a separate entity for new business. And we've discussed this over the last couple of years. It's been a key part of our overall capital strategy to attempt to license and capitalize entities so that we could drug [ph] or write that new business as well. We have entities in place that are fully licensed and capitalized and available to write new business outside of our flagship. And -- but to date, we've been unable to really get the GSE approval to be able to write that production in all 50 states out of those new entities. So, so far, it's really been just limited to where we have not received waivers in a handful of states. We plan to continue to work that. As RMIC said they were going to yesterday, additionally, we think that there are significant amount of commercial risks associated with the approach they've taken. I mean, you don't just simply turn things off and turn them back on and think you're going to be able to maintain your commercial relationships. I know that's a reality. So given where we think we are right now, we think it was a good option value to take the move that we did. And I'll turn it back to Mike.

I mean -- and going back, Steven, to your point, as I said in my prepared remarks, we didn't have an intent to sell those MIC shares. We couldn't get statutory credit out of those, but, listen, I don't want to sugarcoat it. We gave capital support to support new business because of how we felt about the industry. But there also has a lot of balance on that as I walked through in the 4 points that I covered in both my prepared remarks and the response to several of the questions. Steven Schwartz - Raymond James & Associates, Inc.: Right. I wasn't going to ask this but from what you just said, my big takeaway from your discussion here is that you are convinced that those shares will not be touched, that you've got plenty of -- I mean, that's the bet, right? You've got plenty of capital in front of those shares.

We certainly did a stress test, claims paying ability, what I'd call a burn down analysis, that to say that you want to have a substantial cushion before those shares would be in line. Steven Schwartz - Raymond James & Associates, Inc.: Okay. And then just last one, this was going to be my last one. Kevin, the claims outlook, the claims payment outlook in USMI, MGIC talked about how they thought that their claims payment, they'd probably maxed in this quarter and they begin to come down. What are you thinking?

I don't think this is the low point of claims payment. I think we should expect some additional pressure on that.

You mean high point, Kevin? Steven Schwartz - Raymond James & Associates, Inc.: You don't think it's the high point of...

No, I do not. It was the high point for us. I think we've been impacted by the foreclosure cycle and the gumming up in the servicing system, extending the claims foreclosure cycle. I would expect that this is not the high point at this point.

Our final question comes from Tamara Kravec with NWQ Investment Management.

It's Sean Vasi [ph]. Mike, can you talk a little bit about the process of how you think about making the actual choices between what your options are, what you want to invest in if you sell things, how you go from studying and thinking about it to kind of the plan of action that you'll go out and execute?

Yes, John. A couple of questions. One is we have been talking first to a number of investors who have shared a number of their views, which I think is an important component to couple with our own views about different business platforms, risks, how do you get value out of that, and we're going to continue that. I think that's got to be an important element of that. Some of that done [ph] invest in one-on-one forum, and then as I get here towards the end of September timeframe, early fall, I'd like to do -- have another investor type of session group. A normal investor day type of session as well. Two, we use a number of advisers, too, so in addition to our own thoughts on that, as we've gone through the portfolio, embedded it and looking at relative synergies, values and also what happens when you take -- pursue certain strategies with one of the, I think, very important screens here being how do you look at your book value per share accretion? Because that can be a very important element along with things like, what are you doing with your returns, EPS considerations and how you drive and improve value. That whole type of process has remained active since our February investor update. And so it's not just -- I'll say, it's not conceptual in mode, it's a very deep and working in mode. And that's why I made the comments that I made. So it's a very thorough, thoughtful comprehensive process, and certainly, I welcome other time and thoughts from people on it. I know we have our own. I do want to emphasize, John, the element of board engagement, that the board is very engaged. As I said, management has a sense of urgency about vetting through this as well as certainly the board does.

Ladies and gentlemen, this concludes Genworth Financial's second quarter earnings conference call. Thank you for your participation. At this time, the call will end.