Genworth Financial, Inc. (GNW) Q3 2011 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Genworth Financial Third Quarter Earnings Conference Call. My name is Corine, and I'll be your conductor today. [Operator Instructions] As a reminder, the call is being recorded for replay purposes. Also we ask that you refrain from using cellphones, speakerphones or headsets during the Q&A portion of today's call. I would now like to turn the presentation over to Georgette Nicholas, Senior Vice President of Investor Relations. Ms. Nicholas, you may proceed.

Good morning, and thank you for joining us. Our press release, financial supplement and additional information regarding U.S. mortgage insurance and investments 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 our Retirement and Protection segment; 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 Insurance Products for our Retirement and Protection business will be available to take your 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 unless specifically noted. And now, let me turn the call over to Mike Fraizer.

I'd like to make 5 key points this morning. First, we saw a more stable operating performance this quarter. Second, we've continued to maintain appropriate risk buffers given the uncertainties in the global environment and improve our financial and investments profile, all in support of bondholders, shareholders and customers. Third, we are managing new business volumes, reinsurance and expenses to benefit statutory performance and our desired capital generation and use profile. Fourth, we have no current plans to contribute additional capital to the U.S. Mortgage Insurance business, and we see sufficient claims paying ability in the business. I will cover a fair amount of detail here on risk containment, claims paying ability, new business and the path going forward in a few minutes. And fifth, we're pursuing a number of steps to better align our businesses and reallocate capital to enhance shareholder value while maintaining sound risk buffers. Let me provide some additional perspectives on several of these points. Starting with the quarter, I was pleased with the direction in Life Insurance results. Long-term care remain mixed. The new block is performing well, and we continue to take actions to improve the performance of the old block where our second round of price actions is well underway. Lifestyle Protection margins have improved nicely over full year 2010 given pricing, risk and cost actions, and we will maintain a strong focus on margins with the lower growth environment in Europe, which pressures revenues. Canada results convey the dynamic of a slowing revenue profile given smaller markets in books of business in recent years. And as a result, we see this platform shifting to being an even stronger capital generator with relatively stable earnings. And Australia is transitioning as expected, absorbing the loss pressures coming from the early 2011 Queensland flood events, as well as the combined pressures of higher interest rates and living cost and elevated currency, and lower consumer spending on some small business owners and consumers. We see the modest declines in home values as a positive, which aid in digesting prior gains, and would expect interest rates after a reduction earlier this week to remain stable or even be reduced further, thereby aiding consumers. I'll now turn to the second point, maintaining appropriate risk buffers while continuing to improve our financial and investments profile. We carry a substantial cash reserve at our holding company of at least 2 years of debt service coverage, finishing the quarter with approximately $700 million of cash or highly liquid securities. We also expect at least $350 million in dividends from the International segment on a full year basis. We have continued to actively manage our investment portfolio reducing certain exposures, particularly in financials, and believe our European portfolio is well positioned. We've also managed our capital levels carefully at the operating platform level and have been very active over the past 10 years in executing forward interest rate hedges to protect against low-rate environment, and these have reduced material economic benefit totaling nearly $2 billion, which you can see on the balance sheet under OCI. Looking ahead, we've taken actions to add to our risk buffers to provide for market uncertainties and still position us to redeploy capital for shareholder value as we pursue certain business portfolio strategies that I will outline in a few minutes. Turning to my third point, we're actively managing a number of levers to benefit our statutory performance and our capital generation and use profile. In Life Insurance, we have re-priced products, chosen not to follow certain competitive pricing actions and expanded use of reinsurance. In the long-term care insurance, we introduced our next-generation product with higher pricing to reflect today's lower rates while continuing our focus on preferred risks. We expanded use of coinsurance for first half 2011 sales and will coinsure 40% of our new generation LTC product. Smaller markets in Canada and Australia have led the smaller books of new business. So as we look forward over the next few years, we expect capital generation to increase as these older books run off. In Lifestyle Protection, we're pursuing the most profitable opportunities, and across our platform, we have taken or are completing cost streamlining actions to enhance competitiveness and adjust to the realities of slower markets where we have further concentrated our product and distribution focus. These expense actions will provide a gross benefit of over $70 million with a fair portion flowing through to benefit 2012 earnings. This brings me to the fourth area, U.S. Mortgage Insurance, and I like to outline several key perspectives here. Let me begin by noting that while we saw improved financial performance versus the prior quarter, there is a way to go here for recovery given a tough environment. So our first focus remains on risk containment and claims paying ability. On this front, we remain active in the area of loss mitigation and continue to drive substantial results with year-to-date benefits reaching $420 million. I would remind you that the bulk of our benefits are derived from loan modifications. Rescission benefits no longer pay material role in our loss reserving provisions or our quarterly results, as we pursued rescissions earlier in the process than some competitors, an important distinction. In assessing our in-force book, we place a strong emphasis on analyzing the strength of our claims paying ability and do this in 3 ways: through internal analysis, third-party independent analysis commissioned by us, and the third-party independent analysis that regulators and GSEs commission periodically. With these inputs, we see adequate claims paying ability and positive value in the business. Of course, these analyses incorporate a range of inputs and assumptions, so we continue to update these analyses regularly as market conditions change. I would note our claims paying ability and business value have benefited from our mix of business, prior loss mitigation actions and the layering in of profitable new business. This brings me to the second area of focus concerning U.S. Mortgage Insurance, which is the ability to write new business and associated capital considerations. As background, we do find the new returns above 20% to be very attractive and our post-2008 books of business are outperforming expectations. Mortgage insurance penetration is up versus the FHA, market share is being reallocated after exits by competitors, and the industry, despite consolidation, retains capacity to meet demand. So let me begin by noting that in evaluating the ability to write new business, several factors must be considered, including: risk-to-capital ratio analysis, which incorporates assessing the quality of the products and mix of risks comprising the in-force portfolio; claims paying ability analysis, including the strength of relative reserve per delinquency levels; next, assessment of where books of business are in hitting peak losses and coming back down the loss curve; and finally, review of the benefits provided by capital optimization strategies or prior capital support actions and how steps to strengthen reserve levels support surplus and claims paying adequacy. In some discussions, the focus is simplistically placed on risk-to-capital ratios, but the reality is more complex, something we believe most stakeholders appreciate. So we think about our ability to write and willingness to support new business on 3 fronts. First, we currently maintain regulatory waivers or other authorizations from 46 states that permit the company to continue writing new business while it's risk-to-capital ratio exceeds 25:1. Second, Genworth maintains separately capitalized, licensed and operational legal entities to write new business for states where waivers are not in place. I would draw your attention to one of these subsidiary entities, in particular called Genworth Residential Mortgage Insurance Corporation, or GRMC, which is capitalized with approximately 1 year of new business capacity nationwide depending on new volume levels. This entity can be used with GSE approval and currently 3 states are being written out of GRMC. This is a valuable asset, and I want to make sure everyone appreciates the flexibility it provides going forward. Third, our strategic focus with the GSEs and regulators has shifted towards the ability to create alternative structures, including investments in new underwriting entities that support future business. These could be funded internally, externality or through a combination of the 2, while we separately manage our existing in-force responsibly and with risk containment and claims paying ability in mind. Certainly, we have seen the dialogue around the possibilities for such new any these strategies accelerate since the exits of older public and PMI from the MI market. Substantial work remains here, and we're intensely focused on it. In this connection, we do see this path is made available as attractive for existing policyholders, led by the 2 GSEs, Fannie Mae and Freddie Mac, regulators, the industry and for parties who want to bring additional capital to the industry. On last quarter's call, we discussed 4 demanding screens which would inform any future decision to provide additional capital support to the U.S. MI business. While market conditions continue to change and we take action and made progress on several fronts, collectively, these factors do not warrant providing additional capital to U.S. MI at present, and we believe that we have other new business alternatives in place for 2012. So the 4 screens remain, and I would emphasize a major factor in this analysis is substantial progress in the enablement of alternative structures, including investments in new underwriting entities. This brings me to my final topic, repositioning of the business portfolio to tighten our focus, rebalance portfolio exposures and support capital redeployment to enhance shareholder value while maintaining appropriate risk buffers. We have evaluated and worked on a number of areas. Our recent Medicare Supplement sale is one such example, and we continue to work on or assess other smaller asset sales. More significantly, last night we announced our intent to pursue a minority IPO of our Australian Mortgage Insurance business targeted for the second quarter of 2012 subject to market conditions. Under U.S. GAAP, the book value of the Australian MI business is $2 billion. This is similar to the strategy we executed in 2009 with the Canadian MI platform and would include sale of up to a 40% stake while maintaining a control position. We have seen clear benefits in diversifying and deepening the capital base in Australia through expansion of third-party reinsurance and the Tier 2 debt issuance earlier this year. We believe this additional step adds to those benefits, while aiding Australia's future business growth strategies, mirroring capital flexibility benefits we gained from our Canadian lifting and supporting objectives to rebalance the portfolio, main control of our strategic mortgage insurance platforms in Australia and Canada and redeploy capital. Our efforts have included appropriate upfront consultation with our regulator, and I would point out that transactions such as these are subject to customary regulatory reviews and approvals as part of the normal execution process. Given securities regulations, we're highly limited in what we can say regarding this proposed transaction at this time. These actions, coupled with other business realignment, capital optimization, risk buffer and tax asset utilization strategies support our goal of accelerating redeployment of capital to shareholders into 2012 with a focus on share repurchase given our valuation. In aggregate, these actions are targeted to generate material redeployable proceeds by mid-2012, and we will update you on our plans and progress. So I'll summarize as I did last quarter. 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 our current business plans, realistic assessment of the current and future prospects of our business portfolio, thoughtful analysis of risks and opportunities, optimizing capital deployment, liquidity and support of our holding company, and taking prompt and appropriate actions to substantially enhance the volume of our business portfolio. Now let me turn it over to Marty.

Thanks, Mike, and good morning. I will begin today with the segment results in the quarter, followed by an update on our capital management progress, and wrap up with some comments on items impacting future quarters. I'll start with the International segment where underlying performance for that quarter was solid. Unemployment in Canada and Australia is stable. The housing markets in both platforms are sound overall, although certain regions are feeling pressure. In Europe several countries remain under stress, affecting employment, housing and consumer lending levels, which remain low. Against this backdrop, excluding tax adjustments, reported earnings were flat year-over-year. There were tax adjustments in both the prior year and this quarter resulting in a higher tax expense of $23 million year-over-year. Looking past those tax adjustments, our earnings decreased 14%, excluding FX, driven primarily by increased losses in specific regions within our international Mortgage Insurance platforms. Capital ratios in Canada, Australia and Lifestyle Protection remain strong, and the businesses are on track to meet their dividend targets for the year. Turning now to performance by each business. In Canada, operating earnings for the quarter were down 18% excluding FX from the prior year from lower revenue as the in-force portfolio seasons, as well as an increase in losses. The underlying performance of this business remains strong but continues to feel pressure from the Alberta housing market, primarily due to a higher average claim size on delinquent mortgages originated in 2007 and 2008. In Australia, excluding the current year tax adjustment, operating earnings were down 4% from last year. The loss ratio remained flat at 48% sequentially, reflecting the slow recovery in Queensland from flooding earlier in the year and continued pressure from higher interest rates, increased living costs, lower consumer spending and a strong Aussie dollar, which impacts tourism and exports. The revenue line in this environment remains pressured for most of our Mortgage Insurance platforms. However, given the smaller books of business being written in more recent years, as the larger earlier books roll-off, these platforms will generate excess capital for the company over the next few years. In Lifestyle Protection, excluding the prior year tax benefit, earnings were up 5% from the prior year and flat sequentially. Despite decreased revenues from lower consumer lending, operating margins have improved this year by 400 basis points as we benefit from price actions experienced lower claim registrations and managed expense levels. Moving to Retirement and Protection, operating earnings increased 8% to $120 million. Most of the results and developments we saw this quarter are similar to those we saw in the second quarter, with the big difference being performance in variable annuities, which was hurt by the tough market environment. Life Insurance earnings were $72 million compared with $33 million in the prior year. The in-force performance improvement that we saw was primarily due to better term insurance persistency as 10-year post-level lapse rates declined on lower levels of exposed premiums. Sales are expected to moderate over the coming quarters as we have raised certain product prices given the factors such as low interest rates, or chose not to follow certain competitors' price reductions. In addition, we have increased our use of the new business reinsurance to manage capital effectively. Long-term-care earnings were $31 million compared with $44 million in the prior year. We are still experiencing higher new claims and lower claim termination rates in older issued policies, driving the overall loss ratio of 71% in the quarter. Our previously announced premium rate increase on the majority of the older issued policies will begin having a material impact starting next year, adding about $50 million in additional premium in 2012 and about $60 million in 2013 when fully in effect. We're closely watching the performance of the older business and will assess additional rate actions accordingly. We continue to see sound performance across the block of newer issued policies with a loss ratio of 51%, which is in line with prior quarters. Long-term care is a good example of where we have significantly increased our utilization of reinsurance to manage risk and capital utilization. Wealth Management earnings were $12 million dollars, and the business continued to experience positive net flows of $446 million, despite the challenging market. Retirement income spread-based or fixed annuities earnings were $20 million compared to $60 million in the prior year. However, Retirement income fee-based or variable annuities had operating losses of $15 million compared to the $10 million of earnings in the prior year. Variable annuity results were hurt by declines in the equity markets, which accelerated debt amortization and increased reserves. Net income was also hurt by hedge ineffectiveness given higher volatility and bases risks due to fund performance. With variable annuities moving into run-off, we're looking at ways to enhance and expand our product management and hedging strategies to reduce GAAP earnings volatility, as well as the potential impact on statutory capital. Turning to U.S. MI. Results continue to be impacted by weakness in the U.S. economy, with unemployment hovering around 9% and a struggling residential real estate market. We still believe the home price decline will continue another 5 to 6 points extending into 2012 for a total peak-to-trough decline of about 25% on the FHFA index. Our total flow delinquencies increased 1% sequentially with new delinquencies down 14% year-over-year but up 10% sequentially, reflecting typical seasonal development. Re-defaults on modifications continued to be within our ultimate expectation of 25% to 30%. Shifts in the payment status, or aging, was relatively stable, while our cure rate, overall, was flat in all groups, consistent with our reserve strengthening in the second quarter. Deliquencies with greater than 12 missed payments grew 1 point from last quarter to 46% of the total. Our average flow reserve per delinquency is relatively flat at $28,800 down slightly from $29,200 from modest mix changes in new and existing delinquencies. Our total amount reserve for flow delinquencies by category is consistent with the second quarter. Loss mitigation savings primarily from loan modifications were $420 million year-to-date, on track to achieve the higher end of the targeted $400 million to $500 million full year impact. We estimate our market share has increased to the tune of 15% to 16% for the third quarter, which reflects a continued shift to the market from the FHA, as well as through our competitors. From a statutory capital perspective, the NAIC's expected adoption of the new statement of statutory accounting principles, SSAP 101, related to the admitting of deferred tax assets, will not have an impact on our U.S. Mortgage Insurance companies since the DTA is not admitted. Moving to investments. The global portfolio is performing well. Core yields are flat at 4.7% in the quarter as we are optimizing cash balances and product portfolio funding levels. Impairments were up slightly in the quarter and from prior year given market conditions. We have $885 million or 1.2% of portfolio in European periphery exposure, which is down $162 million from the second quarter primarily due to opportunistic sales. Our European periphery sovereign exposure is less than $50 million in Spain, less than $4 million each in Ireland and Italy, and we have none in Greece and Portugal. Overall direct exposure to the periphery is only $335 million, while other exposure is indirect, issued primarily by subsidiaries outside of the European periphery or through multinational companies. Our unrealized loss position on our European periphery exposure is $50 million as of September 30 We've posted some materials to the website to provide some additional information on our European exposure. Shifting to rates. The low interest rate environment presents debt-to-liability management challenges for the insurance industry. For us, those impacts are not very significant in our Mortgage Insurance and Lifestyle Protection businesses given our short product duration. The main impact of lower rates is in our life, long-term care and fixed annuity lines. We've actively managed and hedged this risk for many years, not only through a duration management of our bond portfolio, but also through extensive use of hedges. In particular, for our long-term care business, we actively hedged cash flow reinvestment risks, with about 75% of future cash flows on in-force business over the next 10 years receiving yield enhancements if rates stay low. While low rates will certainly impact earnings, we believe our risk management programs make this pressure quite manageable. As an example, assuming that new money yields remain at current levels through 2014 and that there are no changes to investment strategy, earnings for the R and P businesses in 2012 would be minimally impacted. That impact is estimated to be $0.06 per share in 2013 and $0.10 per share in 2014. Potential DAC unlocks will have incremental impact of about $0.02 to $0.03 per share over that period. Turning next to the holding company. We remain very focused on maintaining appropriate risk buffers. We are also making headway in our strategy to create further dividend streams to the holding company, particularly in Retirement and Protection, which I'll discuss shortly. These are important steps in maintaining our financial strength for policyholders, bondholders and shareholders. At the end of the third quarter, the holding company held cash and liquid securities of approximately $700 million, which is about $150 million above our cash buffer target of 2x debt service coverage. We expect to maintain a similar excess as we head into 2012, and our 2011 plan of $350 million dividends from our international businesses remains on track. Going forward, an important part of our strategy is to re-establish ordinary dividend capacity from our life companies by 2013. We're implementing and executing several initiatives to grow statutory earnings and unassigned surplus in order to restore this capacity. Such initiatives include managing product mix and volumes in these business, use of reinsurance and executing potential life block transactions. Proceeds from initial transactions are expected to remain in the life companies to build their unassigned surplus positions. We're progressing on our first such transaction and we'll provide updates on the appropriate time. Our sale of the Medicare Supplement business freed up $205 million of capital, which is a bit lower than the $240 million initially estimated due to some subsequent portfolio and tax actions, which also provided capital benefits and reallocated tax impacts. We're still intending to dividend up to the holding company the majority of this process, which is likely in a couple of steps over the next few quarters subject to regulatory approval. Looking ahead to the fourth quarter. In conjunction with the plans Mike discussed to pursue a minority IPO of our Australian mortgage insurance business, we anticipate a tax charge in the fourth quarter of up to $80 million related to this planned transaction. Also in the fourth quarter, we plan to change our operating business segments to better align our businesses. Under this new structure, we will operate through 3 divisions: Insurance and Wealth Management, Mortgage Insurance and Corporate Run-Off. The Insurance and Wealth Management division will include the following operating business segments: U.S. Life Insurance, which will include our Life Insurance, long-term care insurance and fixed annuities businesses; Wealth Management; and International protection, which will include our Lifestyle Protection insurance business. The Mortgage Insurance division will include the following operating business segments: U.S. Mortgage Insurance and International Mortgage Insurance. The Corporate and run-off division will include the run-off segment in Corporate and other activities. The run-off segment will include variable annuities our remaining Medicare Supplement insurance, institutional products and other non-core businesses. This alignment of businesses will allow us to sharpen our management focus on common aspects within each group of businesses, while taking advantage of current financial, risk management and product synergies. We intend to reflect this new segment reporting in our fourth quarter earnings release and in the 2011 10-K. Finally, we will adopt the FASB's new DAC guidance this January. We expect the impact will be a reduction in retained earnings and stockholders' equity of approximately $1.3 million to $1.6 billion. We expect to defer fewer costs but record lower amortization, resulting in decreased earnings going forward. We are evaluating a number of options for adjusting distribution and marketing structures to mitigate the effects of the standard, and we will provide an update on the expected earnings impact on our fourth quarter earnings call. In closing, we remain extremely focused on addressing performance and mix of our businesses, managing risk, generating capital and increasing value for investors. With that, I'd like to open it up for questions.

[Operator Instructions] We'll take our first question from Andrew Kligerman with UBS.

With regard to the reinsurance transactions you mentioned in the press release, and then as I understood it in your dialogue just now, you've got a 40% coinsurance arrangement on long-term care going forward, and Marty mentioned that he was doing some work on a block of life insurance. Could you elaborate a little bit more on the types of reinsurance that you're seeking and the potential capital that could be freed up? And I have a follow-up.

Thanks, Andrew. Let me hand that over to Pat Kelleher. Pat?

First, with respect to the reinsurance of new business. Really, what we're doing there is we are managing the allocation of capital to product lines to be within our target budgets for capital generation and capital usage as we move through the year. This is all part of the strategy that we've got to basically engineer a series of changes to the statutory earnings and unassigned surplus positions of the life companies, such that we bring the life companies to the point where its paying annual regular dividends and starting in 2013. And I'd probably put this in the larger context is the changes you mentioned are a part of that strategy. So first thing we did was implement the targeted pricing changes, increasing price in long-term care, which Mike referred to in his conversations. And at the same time, we sought out reinsurance, which is real risk transfer reinsurance, and in particular, a good portion of it is coinsurance. And what that does is give us not only capital relief relating to the risk transfer, but it also provides financing for the acquisition costs of the business. And that kind of helps us manage the utilization of capital. Like, if I look at the impact that we've had, say, in the second and the third quarter, that's already providing savings of capital of about $25 million to $30 million a year in terms the new business -- I'm sorry, $25 million to $30 million a quarter in terms of the new business capital utilization, which is pretty material when you put it together and look at it from a year's -- from a whole year perspective. We've also, at the same time, increased target spreads for new annuity production. And moving beyond the new business, we're supplementing these changes with what I'll call event-driven increases in earnings, like the Med supp sale and the selected life block transactions. So think of those transactions as a bigger and more transformational, and they take a little bit more time to execute. But we are making good progress on those during the current quarter. Marty also mentioned that we're looking to minimize gains and losses associated with equity market impacts, and that's an important focus. So you put all these things together, they're designed to improve statutory earnings, create dividend capacity in line with the plan that Mike outlined.

That's great. So for now, I guess, I should just think that the -- a few hundred million that you've mentioned around the life blocks is something that we'll get more clarity as it progresses, is that it?

Exactly.

Okay. And then in terms of priorities. With the capital from potential IPO minority stake in Australia, with the gradual freeing up of capital, I guess I'd like to know, Mike, what your priorities are. You mentioned share repurchases on the call. You mentioned that capital, I guess, would be needed to start-up new U.S. MI entities to work around some of these risk-to-capital issues. So what are your priorities as you generate this cash and proceeds? Where does it needs to go first, second and third?

Well, Andrew, just, again, putting it back in a broader context, we're aiming for a significant proceeds, and we've had very much a clear focus on share repurchase as a priority given our valuation. Now we do, as you pointed out, have a number of initiatives in process, whether you look at the Australian IPO, the Med supp proceeds -- I've pointed towards some other smaller asset sales that we continue to work on or evaluate. So as we line those up and look at redeployable amounts, we'll of course look at the risk environment to make sure any specific level of redeployment is sound and then move forward. I do think it's important to point in that -- point out that in some cases -- you could also have some proportional debt pay-downs along with something like a share repurchase to maintain the coverage ratios where you want them. But clearly, as I stated, our focus of redeployment is on share repurchase, and any other uses would have to earn their way into that mix. And I outlined 4 demanding screens previously on anything having to do with U.S. MI.

Mike, how much excess capital do you currently have? And how soon could you begin the repurchases if you so choose?

Well, first, I'm not going to speculate on timing beyond my stated comments of about wanting to accelerate the repurchase or other deployment of capital into the 2012 timeframe. Now we're going to move as expeditiously as possible while being prudent, and we will update you periodically on that process. Now let's go back to your point. First, if you look at the business today and you said, "Where do you have the greatest excess capital," while you have excess capital versus various hurdles within each segment, where you look at what you would term the most fungible excess capital is in the International segment. And hence, you do see dividend streams coming up to the holding company. Capital within U.S. MI is staying within U.S. MI to be used there. Capital, currently, that's within the Life business is staying there. So as Pat laid out, we're trying to get back, again, expeditiously to regular dividends on the one hand and event-driven transactions on the other. So we're going to look at this quite intently, quite actively. I would like to move, again, given the valuation as expeditiously as possible, but you can expect us to give you an update on our progress, our plans, certainly as we move through, for example, fourth quarter earnings.

And then just lastly, the capital needed for these new entities in U.S. MI to kind of work around the 27.5:1 consolidated risk to capital ratio. How much capital my that require in the near and intermediate terms?

Well, first, I was trying to be very thorough in my comments to say how should one think about capital measures, and it's not just as simple as a risk-to-capital ratio. There's a lot of context and I walked through several points around that. And first of all, we have waivers in place in 46 states, as I alluded to. And we think we have a better book of business, and we give visibility on that book of business. Second behind that, we have the GRMC entity that I talked to that's capitalized today, as we speak, with we would estimate to be about a year's worth of production. And again, it's operational and licensed, and we see that being active on as necessary on a nationwide basis. And then you get past those 2 vehicles, or those 2 paths, and our focus is on new types of underwriting entities. And it's premature to comment around those specifically, but it is an active regulatory discussion. So I think we have a good quarter, in risk-to-capital and the way we've managed ourselves to begin with. We have GRMC right behind that. And again, we would have to see something else develop to make that -- I'll say, enter the mix to work with some of these new entities, and we'll see how those discussions develop.

Great. So it sounds like no new capital may be needed in the next year or so. Is that the way I -- we should take that?

I think I was pretty clear in my comments about how to think about it.

We'll take our next question from Donna Halverstadt with Goldman Sachs.

One of the things I wanted to ask you back was about the comment you made on your second quarter call when you said you recognized that the characteristics of Life and Wealth Management compared with MI businesses may appeal to different investor groups. And then you said you're taking steps to facilitate the option of separating the company along those lines, and I think some people took that to mean a complete separation. But with your announcement of Australia, sure, you create a new vehicle for people want to invest in MI, but the folks who want to invest in Life are still left with a hybrid Life/MI insurer. So do you see the Australian IPO move is consistent with or inconsistent with your prior commentary? And more generally, how are you thinking about long-term business mix as you pull these different levers?

Thanks, Donna. It's Mike. Two thoughts on that. Clearly, if you look at the 2 thrusts of what we do, one is global Mortgage insurance and the other is insurance with a protection orientation that's complemented by the Wealth Management business through independent advisors. Now those businesses, some have performed quite well and consistently. Some have been in various stages of transition. But as I pointed out, we wanted to concentrate the focus within each of those 2 areas around our best platforms and our best value proposition, and maintain the option in the future, if we can create more shareholder value, to be able to pursue this distinct path. That's just not where we are today. We have financial synergies that benefit the holding company, as an example. We have various businesses in stages of transition. So we'll certainly consider that in the future, but that's not where we are today. I think as I've talked to investors about this, what they've appreciated is that the management is -- and the board, is open to considering those types of things if that creates more value for the company. And that's exactly what I've been trying to convey, and that's what we've had, as far as I think, quite constructive discussions with the investment community. I will say that the alignment that Marty walked through though, does give you some synergies around the consumption of your tax assets. So we're -- and after achieving some operational and financial synergies, we're in a much better, I'll say, situation today to utilize both those tax assets with the alignment that Marty articulated.

Okay. And then specific to U.S. MI, the potential new underwriting entities, just to be clear, does -- would investing in those be subject to the same 4 screens that you're applying to your current MI writing vehicles?

Yes.

Okay. And then just theoretically, and let's put aside the fact that you're putting quite profitable new business on the books, and put aside the potential alternative of these new underwriting entities. But theoretically, if you wanted to think about putting U.S. MI into run-off, would that be an easy decision to make in terms of no collateral damage? Or to the extent that regulators and GSEs did not want you to do that, could the MI state regulators get the life insurance state regulators to make life hard for you? Is that a consideration as you think through alternatives in the U.S. MI business?

Well, I think about it -- I guess, I think about it on 2 fronts. Because as you said, you're asking a theoretical question. First, in this type of market environment, we've continued to update all analysis of all scenarios. Because if anything, this market has always had some twists and turns, and it's not the greatest economy or the greatest housing market out there. So one of those scenarios, of course, that you have to update and evaluate is a company-managed or a company-sponsored run-off scenario. So we do that on a rigorous basis because you have to keep that in amongst all of your options. Now I also pointed out, I think we have several other avenues, with the waivers in place, with the GRMC in place, to give us quite attractive flexibility. And again, when you look at our reserves, our reserve for delinquency levels, the quality of what we put on the balance sheet can be differentiated when compared to other situations. Now when you take any action in any insurance business, of course, you're going to factor into your decision process regulatory decisions and any intended effects. But I think that's just part of a normal business approach.

Moving on to our next question from Steven Schwartz with Raymond James. Steven D. Schwartz - Raymond James & Associates, Inc., Research Division: Donna's question. I got to say, Mike, I think I'm hearing something different. I mean, I think I heard in the first quarter, U.S. MI, we should keep it for the tax reasons. In the second quarter, I think you were saying, "Look, nobody's giving us any value for the tax, therefore, we might as well split it, or at least investigate splitting it." Now it seems to me, you're saying, "Look, that tax is important." Is that a way to summarize this? I mean, everybody has got a right to change their mind, so I understand that. But is that the way to summarize this?

No, that's not the way to summarize it. I think you're taking comments and chaining them together with a different rationale than is there. There are tax assets. That's just a fact. You look at them. Last quarter, I was asked the question basically, "Is that the head of the dog or the tail of the dog?" I said, "You look at them, but you don't let tax assets drive your strategy." But if you take that forward, I've simply pointed out that the alignment that we have now does optimize the utilization of those assets. Now when you go back to looking at our portfolio overall, let's recall what we have. We have a holding company. Underneath the holding company, under our current segmentation, you have International, U.S. Mortgage Insurance, and you have Retirement and Protection. International is what's paying dividends to the holding company. You do not have ordinary dividends at this point for Retirement and Protection coming up, and you certainly don't have dividends coming up from U.S. Mortgage Insurance, which is effectively managing its risk in-force. And you want to have balanced cash flows, or more balanced cash flows to a holding company. Hence, past dialogue about all of the concerted effort to drive statutory earnings and get back to an ordinary dividend is quite relevant in this instance. So when you're talking, going back to Donna's question, about how you manage portfolio over time, you have to look at the entire enterprise and look at what you have at the holding company. If you took a different path, how would you handle that, what would its capital structure be, whether would be the balance of the cash flow flows in it, and that's what you hear me articulating in pieces. But don't build this around a tax asset assumption. That's not the driver here. That's just something that you will have an impact on, one way or another, but that's not what's driving the structure or the strategy. Steven D. Schwartz - Raymond James & Associates, Inc., Research Division: Okay. If I can do follow-up with a couple of quickies. The waivers, are those annually approved? On the U.S. MI side, of course, is what I'm talking about.

Steven, this is Kevin. There -- it depends on the nature of the waiver. The initial waiver from the state of North Carolina was good for, I believe, 3 years. It is revocable. However, the initial approval was for up to 3 years. Some of the -- and then it depends, based upon the unique state, whether it's an annual or a multiyear approval. So it varies across-the-board, but right now, we're feeling in good shape with the level of the approval authority provided by the waivers. Steven D. Schwartz - Raymond James & Associates, Inc., Research Division: Okay. Kevin, just a follow-up there. GRMC, is -- was that -- you said it was financed for a year's worth of business. Was that for the 3 states or was that...

GRMC is a state that provides additional flexibility. It's currently being used for 3 states that either didn't have statutory authority to provide the waivers or did not necessarily grant the waivers. So it's an entity that is operational. It has the appropriate licensing and capitalization. And then what we get for that is we did have to get the GSE approval to write states -- to write production in those states that have not granted those authority, and so far we would receive that for the 3 states where it's been necessary. Steven D. Schwartz - Raymond James & Associates, Inc., Research Division: Okay. And then final one, on -- my understanding here is that the dividends from the Life Insurance company are limited. The greater-than is limited by the unassigned surplus, which I guess you don't all have. Is there a simple way to explain how reinsurance would increase that unassigned surplus?

This is Pat. Yes, there is. I mean, to the extent that you use reinsurance to monetize the value of business in-force, the gain associated with the value of the business in-force comes through as operating earnings, and therefore, increases the value of unassigned surplus. And when you use it for a new business, you look at it in a different way. You avoid the strain associated with the new business because you're really financing it and passing the risk to -- a reinsurer bears a portion of the risk, and that avoids the initial loss associated with that. So the combined impacts of those strategies have meaningful impacts to earnings and unassigned surplus. Steven D. Schwartz - Raymond James & Associates, Inc., Research Division: So the -- on the blocks, these would be, then, re-transactions, Pat?

These would be -- think of them as monetizations or embedded value-type reinsurance structures.

Moving on to Geoffrey Dunn with Dowling & Partner. Geoffrey Dunn - Dowling & Partners Securities, LLC: Two questions related to Australia. First, Australia is one of your best ROE businesses, so can you talk about the decision to potentially IPO, part that away, weighing that against the redeployment of capital and the reduction of the mortgage exposure? And then second, obviously, the detail on the MI side has been talked about repeatedly as part of the consideration in the spinoff. I understand market conditions are uncertain, but if you sold your piece of Australia at book value, does that generate any kind of material gain that can be placed against that DTA?

Geoff, Mike. Want me to sort of take these in concert. First, you're right. I mean, we see Australia as an important business. I think it's a good platform with good potential, and our desire has been to maintain control of our leading private MI platforms. And I put both Australia and Canada in those categories as they act as a key source of earnings, capital and returns. And certainly, those benefit the holding company and the enterprise. Our view is that this transaction helps you retain those benefits, but it also helps you rebalance exposures in the portfolio. It helps broaden the Australian capital base, and I mentioned the moves we made with third-party reinsurance, as well as Tier 2 debt issuance that have been a plus, and that supports future growth strategies for the Australian platform, and it frees capital for redeployment. And when you look at our valuation, redeployment through share repurchase is quite compelling. So I think we get to intersect a number of benefits. Now regarding your second question. With the realignment that we have in place, the realignment does let you take advantage of tax loss and income or gain offsets. Now I can't speculate on what the individual tax situation would be concerning Australia, and I'm not going to, but we do have the alignment of the structures to create the offsets when you look at the losses that have been generated out of U.S. MI and the positives that have come out of international MI. Geoffrey Dunn - Dowling & Partners Securities, LLC: Okay. But at this point, you're not able or willing to confirm if there'll be a gain situation if you sold it at book value?

It's just premature to me to talk about tax items right now.

Jeffrey Schuman with KBW has your next question. Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division: I was wondering if you could clarify something about the life company transaction. I think Marty said that if you look at the reinsurance and some of the transactions that some of the capital that's generated would be retained in the life company, at least in the near-term. Is that because you need to improve the capital level there or is that related to the fact that you can't pull it out from ordinary dividends until possibly 2013?

This is Marty. To pull dividends out while we saw the negative unassigned surplus takes regulatory approval. The reason we want to leave the proceeds in our life block transactions is to really build up that negative unassigned surplus to get it to be positive. To get us on track to have a regular dividend, as Pat said, in 2013. Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. So is that a matter of capital level or is that a matter of positioning yourself correctly for the dividend? Is that the right way to think about it?

Exactly right. Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. And one clarification. The $80 million tax item that you talked about for the fourth quarter, should we think of that as -- is that also a cash item? Is that essentially a cash offset against the gross proceeds you might get from Australia, or is it not a cash item?

No, it's not a cash item. With the intent to pursue this plan, there's a potential that we might be repatriating earnings, so there's a tax liability that we're accruing in that context.

John Howard [ph] with Canyon is next.

I have a question for you on the capital levels at the life company. In terms -- you mentioned in terms of getting to a point where you'll be able to pay out dividends on a regular basis. I was wondering, does the new business that you're writing put a strain on that?

This is Pat. We have profitably coming off the in-force. We have new business, where -- which for some product lines produces some amount of strain. For other product lines, there's really not much. Like for example, fixed annuities does not produce much strain. And what we're doing is we're using reinsurance in such a way that we are building future earnings capacity and using the block transactions to increase the current unassigned surplus positions to target levels, so that not only can we come back to regular ordinary dividends in 2013, but that going forward in '14, '15, '16, the business that we put on the books is sufficient to sustain that level of ordinary dividend capacity. So it's a bit of financial engineering, and we believe that we're striking the right balance for the objectives we have in mind.

Okay. In terms of the IPO, when you announced Canada, I think you were able to IPO it 2 months later. In terms of Australia, why are you announcing it with so much lead time? Which is second quarter, where you put yourself into a position, if the markets move, you may not be able to actually achieve what you stated. I mean, why is such a -- so much lead time here?

It's Mike. You're right. We do have IPO experience in multiple markets. I would note that the process in Australia is a bit more complex, which does influence timelines. There are some specific factors here. Consulting with advisers, the desire to include year-end financials was identified, and those become available later in January. There is some calendar considerations as well. You have a market that will soon be moving into the summer and holiday season. And also, it's not typical for IPOs to be marketed during the reporting seasons, which are February and August. So you would see, most IPOs in Australia timed such that they are completed in either Q2 or Q4. But let me be real clear, we're very focused on this transaction, and we are trying to move as expeditiously as possible. And in if there are ways to prudently do it faster, certainly that's what our focus would be.

Okay. And lastly, with the trends in the U.S. MI and how they haven't necessarily improved, and some of the new delinquencies and the re-defaults, do you feel differently about -- if you could have done it again, would you have maybe not contributed the Canadian stock? Especially with this new extraordinary dividend that could've come up to the hold co that's coming out of Canada? You probably would have had more resources at the hold co to support the debt, and maybe do some share buybacks a little earlier. Is that -- how do you think about that?

Listen, we can all have different views. We have to balance and look at a lot of factors. We have to look at a lot of time frames, as well. I am comfortable with the decision we made. But I also was clear on last quarter's call, and hopefully, I've provided some more color on this quarter's call about what tasks [ph] are and what our priorities are for capital redeployment. And one thing I just want to go back and update. There was a discussion about what are the timing on some of the waivers, and specifically the North Carolina waivers through January 31, 2013. So I just want to make sure that, that came across clearly for everybody else.

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