Genworth Financial, Inc.
Q4 2011 Earnings Call Transcript

Published: 3 Feb 2012

[Operator:]

Good morning, ladies and gentlemen, and welcome to Genworth Financial's Fourth Quarter Earnings Conference Call. My name is Giovanni, and I will be your coordinator today. [Operator Instructions] As a reminder, the conference is being recorded for replay purposes. [Operator Instructions] I would now like to turn the presentation over to Georgette Nicholas, Senior Vice President of Investor Relations.

[Georgette Nicholas:]

Good morning, and thank you for joining us for the first of 2 calls Genworth will be holding today. The first-hour call will be dedicated to a discussion of fourth quarter results. The second-hour call will begin at 11

[Michael D. Fraizer:]

Thanks, Georgette. 2011 was a year of actions designed to reposition the company to move through an uncertain environment and provide a foundation for improved shareholder value. We recognize that the year was a difficult one for shareholders and work to listen, gain feedback, intensify our efforts to improve both the performance and positioning of the company. We have taken important steps with the business portfolio and individual product lines to sharpen our focus, rebalance exposures, maintain or expand risk buffers and support capital generation and redeployment. We made progress in several areas with more work to do and will maintain an intense execution focus in 2012. There are many aspects of markets that one does not control. Today, I would like to highlight 4 important levers that we do control and actively utilize to improve future operating performance. First, we continue to reposition the business portfolio to maximize value over the medium to long term. We're pursuing a number of steps to better align businesses, enhance risk profiles and reallocate capital to support shareholder value. Second, we are managing the volume and mix of new business, repricing products actively, utilizing reinsurance strategically and managing expenses, all to maximize profitability, benefit statutory performance and improve our capital generation use and return profile. Third, we are managing the in-force portfolio through loss mitigation strategies, repricing actions, life insurance block transactions and active management of investment exposures. And fourth, we are taking actions to add to our enterprise and holding company strength by expanding risk buffers and managing overall risk exposures and capital effectively. A key focus here is adding to our capital flexibility and distributable earnings profile to support dividends to the holding company, which benefits shareholders and bondholders. As you saw in our earnings release, we resegmented our financials this quarter. This reflects moves to align businesses to maximize operational and financial synergies. We are now operating through 3 divisions with 6 underlying reporting segments. There are clear benefits from our new structure. On the product and risk management front, we're getting better transfer of ideas, analytics and mortgage insurance loss mitigation strategies under this alignment. From a financial synergy standpoint, we now have an approach in place that accelerates use of our tax assets. And we have been able to improve the efficiency of capital structures. I'd like to provide some perspectives on the 4 key leverage we control and how they impact each division. Starting with Insurance and Wealth Management, I'm pleased with the progress we are making to reposition the portfolio. We have exited non-strategic lines, such as variable annuities and Medicare supplement, to better concentrate on our strongest market positions. We continued this in January with the announced sale of our tax and accounting advisors unit, Genworth Financial Investment Services or GFIS. This sale will allow us to focus on our core turnkey asset management businesses. We expect to receive $79 million in proceeds from this transaction and have an additional earnout opportunity. We are being selective regarding new business. We have implemented product design changes and repriced many products across life and long-term-care insurance, as well as fixed annuities and have chosen not to follow certain competitor price changes. In long-term care insurance, we introduced our next-generation product with higher pricing to reflect today's lower interest rates while continuing a focus on preferred risks. In the International Protection, we are focused on improving pricing and risk-sharing arrangements and changed the business model to withstand higher unemployment. Given revenue pressure from the low-growth environment in Europe, we are entering or considering select new countries through reinsurance or small capital investments to rebalance our European concentration over time and support segment revenues. We are managing our in-force portfolio and long-term care through care management and are executing our second round of price actions where we have received approval in 39 states. And in Lifestyle Protection, margins have improved nicely over full year 2010 given pricing risk and cost actions. Finally, we remain focused on managing product mix, transactions and platforms outside the U.S. life companies to maximize statutory earnings and improve capital profiles. We expect to continue shifting sales mix between life and long-term care versus attractively-priced fixed annuities that are less capital-intensive. We are utilizing reinsurance actively in life and long-term-care insurance to optimize new business capital needs. In addition, targeted transactions have improved and will continue to add to life company on the signed surplus. This include the gains from unwinding and resetting forward-starting interest rate swaps and the first life block transaction, which Marty will discuss in more detail. Finally, sound operating dividend generation by international protection and wealth management benefit the holding company. Turning to International Mortgage Insurance. We continue to move forward with our planned minority interest IPO of up to 40% of Australia mortgage insurance. We still anticipate second quarter 2012 execution. We have not encountered any regulatory or market conditions that would change that timing. The planned IPO supports objectives to rebalance the portfolio, maintain control of our strategic mortgage insurance platforms in Australia and Canada, add to risk buffers if conditions warrant and redeploy capital. Regarding new business, we have maintained pricing discipline and guidelines in a competitive environment. In Canada, we are working to gradually rebuild share as government guideline changes, such as lower amortization product and lower LTVs and refinancings, have contributed to a smaller market. Australia has seen a larger origination market, and we renewed a number of key commercial relationships during the year while maintaining pricing discipline. In Europe, we reduced new business over time, given the economic environment and stopped writing in some countries. We continue to manage the in-force portfolio to minimize losses through our loss mitigation activities such as workouts, settlements and asset management. On the capital front, International Mortgage Insurance achieved its dividend goals and remains a strong generator of capital as large older books season and smaller new books are written. We are also managing our capital and risk through the establishment and use of global external reinsurance markets in certain countries. So as we look forward over the next few years, we expect capital generation to increase from these platforms. In U.S. Mortgage Insurance, we saw improved financial performance over the past 2 quarters. But there is still a way to go here for recovery given the tough market. Our focus remains on risk containment of the in-force portfolio and claims-paying ability. On this front, we remain active in the area of loss mitigation and continue to derive substantial results with the year-to-date benefits reaching $567 million. In assessing our in-force book, we place a strong emphasis on internal and third-party analysis of our claims-paying ability. And we continue to see adequate claims-paying ability and positive value in the business platform, which Kevin will discuss in greater detail on our February 10 call on USMI. We saw an increase in flow new insurance written over the prior year and prior quarter. Mortgage Insurance penetration is up versus the FHA, especially in the purchase market. We estimate that our market share is flat, despite reallocations after exits by competitors, as we have maintained our pricing and guideline discipline. And our post-2008 books of business are very profitable, significantly outperforming expectations. Regarding our ability to write new business, a complete evaluation must take into account several factors, including risk to capital, claims-paying ability, assessment of where books of business are in the loss curve and, finally, capital alternatives. We invest appropriate time with regulators, customers and others to help support this comprehensive assessment approach. We have the following alternatives to support new business currently. First, we currently maintain regulatory waivers or other authorizations from 44 states that permit the company to continue writing new business while its risk-to-capital ratio exceeds 25

[Martin P. Klein:]

Thanks, Mike, and good morning. I will begin today with the segment results in the fourth quarter, then provide an update on the holding company and wrap up with a discussion on accounting changes impacting future quarters. I'll start with the Insurance and Wealth Management division, where operating earnings increased 12% from the prior year to $145 million, driven by results in the U.S. Life Insurance segment. Operating earnings were down sequentially, mainly from International Protection and results in the Life Insurance business. Insurance earnings were $60 million for the quarter. We continued to see sound new business performance impacting our results as well as favorable mortality experience versus pricing. Term UL and other universal life sales were down approximately 4% from the third quarter. We expect sales to continue to moderate in the first quarter of 2012 due to our previous pricing actions and capital discipline. We continued to use reinsurance on new business to manage capital effectively and expect a capital benefit of approximately $25 million per quarter in 2012. In addition, we are completing our first life block transaction, which will generate approximately $100 million in initial aftertax capital benefits for the life companies. We have executed the reinsurance treaty and are redeeming associated bonds under the terms of last month's successful bond tender. The transaction will be completed in the next few weeks. Long-term care earnings were $38 million for the quarter. The reported loss ratio of 67% improved over the prior year and the prior quarter. We experienced low claim termination rates versus the prior year, but we did see lower new claims compared to the third quarter as well as an increase in active policy terminations, primarily in our older issued policies. Additionally, our previously announced premium rate increase on a majority of the older issued policies has begun to take effect. We still expect the continued impact in 2012 at about $50 million in additional premium in 2012, and about $60 million in 2013 when fully implemented. We are closely watching the performance of the older business and will assess potential additional rate actions accordingly. We continued to see sound performance across the block of newer issued policies, with a loss ratio of 50%, in line with prior quarters. As we manage capital and risk, we use reinsurance on new business, reinsuring about 40% of the new long-term-care product. Fixed annuity earnings were $16 million as we adjusted for the state guarantee fund assessment. In December, we launched our new suite of index annuity products designed to further enhance our annuity product offerings. We expect to increase sales in 2012 by approximately 10% as we adjust the sales mix over products to build capital and statutory earnings in our life companies. International Protection reported earnings were flat to the prior year and decreased 24% sequentially due to top line pressure as European economic concerns reduced consumer and related insurance product sales. Despite the top line pressures, full year operating margins improved more than 360 basis points over 2010 results, returning to 2008 pre-recession levels. Wealth Management earnings were $12 million for the quarter. All in, 2011 full year net flows were positive $1.4 billion despite a challenging environment and the negative net flows in the fourth quarter. Last month, we announced an agreement to sell Genworth Financial Investment Services, or GFIS, to Cetera Financial Group. GFIS accounted for about 14% of wealth management's earnings and about 11% of assets under management in 2011. Turning to capital. International Protection and Wealth Management paid $199 million in dividends to the holding company in 2011. With respect to statutory capital for the U.S. life companies, the unassigned surplus at year end is estimated to be in excess of $50 million. The RBC ratio topped 400% as we completed the sale of our Medicare supplement business during the quarter and also realized tax benefits from locking in gains on our forward-starting interest rate swaps. We still intend to dividend up to the holding company a significant portion of the proceeds from the Medicare supplement sale over the course of this year, subject to regulatory approval. As an important part of our strategy to reestablish ordinary dividend capacity from our life companies by 2013, we are working on executing several initiatives to grow capital, statutory earnings and unassigned surplus in order to restore this capacity. And we will expand on these in our 2012 business goals call. Moving to the International MI segment. Reported earnings were down by $20 million from the prior year, and earnings decreased to 24% when excluding FX. Underlying performance for the quarter was mixed. Unemployment rose slightly in Canada and was flat for Australia, while the housing markets were performing as expected. In Europe, the uncertain economic environment is creating pressure in some countries, particularly Ireland. In Canada, excluding FX, operating earnings for the quarter were down 15% from the prior year. The loss ratio increased 4 points sequentially to 40% from a reserve strengthening associated with higher severity on existing delinquencies. In Australia, excluding FX, operating earnings were down 9% from last year. The loss ratio decreased 2 points sequentially to 46%, reflecting a decline in new delinquencies. The delinquency rate improved across all regions sequentially. As part of our risk and capital management strategy, the Australian business continued to expand its reinsurance program. Combined, Canada and Australia paid dividends of $215 million to the holding company in 2011. And both platforms continue to generate capital as smaller books are written and the larger books continue to season. The operating loss in other countries in the International Mortgage segment was $15 million from losses driven by the European economic environment, primarily in Ireland from higher delinquencies. Ireland is seeing increased new delinquency development from prolonged economic stress and significant home price declines. After several years of limiting new MI business in Ireland, we stopped writing the business altogether midway through last year. In addition, we have been working to manage our exposure in Ireland through loss mitigation. We will expand on this subject as part of our discussion of the impacts of European exposure for our company on our second call this morning. Turning to USMI. Results continued to be impacted by weakness in the U.S. economy. Flow NIW increased to 23% over the prior year and 19% sequentially, reflecting the continued gradual shift away from the FHA and higher refinancing activity. Our estimated market share remains flat at about 40% as we maintain pricing discipline. Our total flow delinquencies decreased 1% sequentially, with new delinquencies down both year-over-year and sequentially reflecting the continued burn-through of the 2005 to 2008 book years as well as a favorable impact from the geographic mix of new delinquencies in the quarter. Redefaults on modifications continued to be within our ultimate expected range of 25% to 30%. Shifts in the payment status or aging was relatively stable, while we did experience fewer net cures driven by declining loss mitigation, consistent with our reserve strengthening in the second quarter. Our average flow reserve per delinquency is relatively flat at $29,100, and our total amount reserve for flow delinquencies by category is consistent with the third quarter. Loss mitigation savings in the quarter eased to $147 million, with workouts declining 16% as HAMP modifications wind down. Our combined U.S. MI statutory risk-to-capital ratio increased to 28.8

[Operator:]

[Operator Instructions] Our first question comes from Andrew Kligerman with UBS.

[Andrew Kligerman:]

Great. So with the MI risk-to-capital ratio at 28.8

[Michael D. Fraizer:]

Andrew, let me turn that over to Kevin Schneider.

[Kevin D. Schneider:]

Andrew, as we said before, we don't think there's a bright line test on risk-to-capital. We think the actions we've taken over last year and the contributions we've made in the last 12 months of the capital levels provide us with a nice quarter to navigate through. We have shared all of our forecasts and our expectation on risk-to-capital development with both our regulators and with the GSEs. And at this point in time, we think they're considering things beyond just risk-to-capital when they assess our ability to continue to write. So they look at our strength of our reserves. They look at the quality of our portfolio. They look at the profitability of the new business, which adds to our claims paying. They look at where we stand on the loss curve and other capital alternatives. So I can't give you any assurance on a 2-year period. The second part of your question, I think that's a little long. But I can tell you at this point in time, we expect to be able to continue to write. We got the benefit of GRMAC, our wholly-owned subsidiary below GEMICO, in the event that GEMICO runs into some problem on the waivers. And that gives us a little bit of extra cushion, which perhaps puts us on out into that 2nd year that you asked about.

[Andrew Kligerman:]

Okay. And then another question to Marty, maybe, on the life company and the statutory surplus. I guess last quarter, you mentioned that you had a negative statutory unassigned surplus. And then I think I heard correctly -- I think I heard correctly today that you have a $50 million positive now and that you wouldn't be able to dividend money from the lifeco to the holdco until next year. I guess, I just want a little bit of clarity on a phenomenal 405% RBC ratio would prevent -- you'd still be prevented from dividending money to the parent co. I want to understand that, maybe a little dynamic there. And then secondly, just given the activity, you mentioned the block transaction and so forth. What would you anticipate being able to dividend up in 2013?

[Martin P. Klein:]

This is Marty. Let me start off, and then I'll turn it over to Pat. Just first of all, hitting the RBC ratio, it really did benefit primarily by a couple of different things. One is the Medicare supplement sales. Those proceeds were about $214 million in capital, and that transaction closed early in October, so RBC is benefiting from that. And it's also benefiting from some deferred tax asset benefits around some of the forward-starting swap gains. So those 2 things together contributed largely to the increase. But really, paying a regular dividend doesn't relate so much to RBC ratios as it does to the level of unassigned surplus as well as to the statutory earnings that the companies have. We will talk more about this on our second call, but let me turn it over to Pat just to give you a little bit of sense for the development of unassigned surplus over the year and some other considerations.

[Patrick B. Kelleher:]

Thanks, Marty. In the third quarter, we reported the negative unassigned surplus after we had seen, I'll say, increases in variable annuity reserves on a statutory basis given the market environment and as well given the drop in interest rates. We saw that rebound in the fourth quarter, in addition to the factors that Marty described as well. We'll go through on the next call that there are a number of impacts in terms of shifting our mix of business, greater use of reinsurance. On a full year basis, I'd say the 2011 statutory earnings were below the level achieved in 2009 and 2010, primarily due to the equity market and low-interest-rate impacts, but -- and a moderately higher long-term-care loss ratio. But I would say that moving into the new year with the block transactions, with the shifts that we've made in our new business capital allocation, we're expecting to see that level climb to at or above the historical levels and position us very well for our target of returning to ordinary dividend paying on an ongoing basis in 2013.

[Andrew Kligerman:]

What were the historic levels of unassigned surplus?

[Patrick B. Kelleher:]

Well, historic, we'll go through that in the second call. They had -- they were elevated above $500 million back in 2007. They came down during the financial crisis due to investment losses. That was offset or mitigated by product-related earnings through that period. And as we build the product-related earnings and complete the block transactions, we expect to rebuild the unassigned surplus to positions that will support, I'll say, healthy, ongoing ordinary dividend capacity starting in 2013 but also in future years, and the block transaction as well as the value creation from the new business and the capital allocations to that are part of that picture.

[Andrew Kligerman:]

Perfect. And then just lastly, the -- maybe some color on the size of the interest rate swap that benefited Genworth in the quarter?

[Michael D. Fraizer:]

I'll take that one, Andrew. So effectively what happened in the fourth quarter is that we unwound swaps generating cash of about $950 million. And those swaps are qualified hedges, so the market value gains flow directly to the balance sheet, and the income recognition would be deferred over the next 20 to 30 years. And additionally, the unwind monetization of the swaps and reinvestment of the cash will generate about $20 million of additional earnings per year for the life companies. And we also, I should note, restruck those swaps to provide protection in the future in case there are further rate declines. And we will also be discussing those income effects in the second call at 11

[Operator:]

Our next question comes from Donna Halverstadt with Goldman Sachs.

[Donna Halverstadt:]

I wanted to start with a follow-up to Andrew's USMI question. Can you give us any sort of specifics on the time frame over which you will continue to assess that business before making a definitive decision on the ultimate resolution of USMI, whether that be at some point in the future starting to feed it again versus starving it, versus killing it?

[Michael D. Fraizer:]

Donna, this is Mike. A couple of perspectives. First, we think we've made a lot of progress in managing our portfolio, as Kevin emphasized and I tried to touch upon in our prepared remarks. The whole focus on containment, maintaining strong claims-paying ability and moving through the current in-force block is a key focus for us. And again, as part of that, you want to make sure you understand the block, how it's performing, how it can perform under various conditions. And that's one of the important reasons we augment not only our analysis of that, but use third-party analysis to do that. So we think we have strong claims-paying ability in place. We think we have a good quarter for new business that takes us out a year-plus, as Kevin talked about. We have -- I touched upon constructive discussions going on with GSEs and others about some alternative structures that add to that capitol flexibility. So I think we're in a good position right now to write this profitable new business, to manage through our in-force with strong loss mitigation. And then we will always actively assess the business and see if something changes on that front, but I think we've got a good runway right now.

[Donna Halverstadt:]

Okay. I also, Mike, wanted to follow up on the comment I think I heard you make in your prepared remarks. I think you referred to Australia and Canada as strategic positions. And if that, in fact, was the label you used, does that mean you have definitively decided to remain a hybrid Life/MI company, albeit with reduced exposure to MI through the partial IPOs? Or is the potential alternative of a more complete split between Life and MI still something that might be on the table?

[Michael D. Fraizer:]

Well, Donna, let me break that on 2 fronts. First, what I wanted to convey regarding mortgage insurance is that we have seen benefit in having multiple platforms because of the diversification of risk that provides, certainly, we move know-how around the world. In fact, that diversification has helped us to be able to work with third-party reinsurers and, really, from nowhere, create an external global MI reinsurance market that we think can benefit certainly ourselves and over time, the entire industry. So that's what I wanted to convey. We will, as I think we have over time, always reassess our business portfolio and see what the optimal mix is of businesses. We have a lot of execution to do and value to rebuild right now. And we get some financial synergy out of the diversification of cash flows to the holding company from both the MI side and also, back to our last conversation of what we see in Insurance and Wealth Management, that we really want to get companies back to paying a regular dividend to the holding company. So we'll evaluate any changes in the portfolio, including do you get a better value for shareholders with a pure-play type structure down the road? But that's -- right now, we have a lot of execution to do with our current portfolio. So I hope you find that helpful.

[Donna Halverstadt:]

Yes. And then the last question is just a more day-to-day type question. Marty, I was wondering if you could just update us on the status of the renewal of the credit facilities that expire in May and August of this year.

[Martin P. Klein:]

Sure, I'd say that a couple of things. One is that the company's balance sheet and its liquidity is very different now than they were a number of years ago. We're no longer having outstanding commercial paper. We're no longer in the funding agreement business. So the need for a facility the size that we have currently is a lot less, I would say. If and as we renewed the facility, we'd be looking at something that's probably, order of magnitude, maybe 1/3 or perhaps even less than the current size. As we think about where we are with our risk buffers and holding company liquidity, we have really developed those and really don't actually need the credit facilities as they stand now given the liquidity that we have. What we'll do is we'll revisit credit facilities later in the year as we make progress on some of the things we're working on, including Australian IPO.

[Operator:]

Our next question comes from Geoffrey Dunn with Dowling & Partners.

[Geoffrey Dunn:]

A specific question on the MI side. Sequentially you saw your claims severity come down about 12%, 15%, which is pretty unusual, even from a geographic shift. So can you discuss what's going on there? Particularly, are you seeing any kind of material emerging curtailment opportunity that you think is sustainable?

[Kevin D. Schneider:]

Geoff, this is Kevin. I'll take that. When you think about our overall loss mitigation efforts, we have through this cycle been focused on, number one, what was coming through in the delinquencies and investigating those and making sure loans were properly underwritten. So that sort of worked itself through the system. As of about the second quarter of 2010, most of our material benefit was gone from rescissions. Now the loans are starting to make it through the delayed foreclosure process and starting to be perfected claims. And as we look at those claims and as we look at the way they were serviced, we're certainly looking at them very closely in terms of making sure that the servicers performed to the standards that are required in our master policy. And where we see that there were some problems in that servicing or breakdowns in the way it was that in the marketplace, and we all certainly read about that on a regular basis, we've been doing some curtailment of the claims, trimming back on interest rated expense and other things, where, frankly, there was no focus put on the consumer. So we have beefed that up a little bit and are going to continue to look at all claims to make sure we're paying every single legitimate one, to make sure we're paying them consistently with our master policy. Now if you look at our supplement, just to give you a little bit of perspective on it, on the quarter, we probably paid 5,600, 5,700 claims in total, something like that. And with an average improvement from the prior quarter, as you referenced, of about $6,000 per claim, you can get some handle on the impact that, that might have over time.

[Geoffrey Dunn:]

Okay. And I know with rescission denials, you tended to have a little bit of forward insight, given the pipeline of investigations. Do you have a similar insight on the curtailment reviews? And is there reason to believe that the severity level could at least be more towards this level than third quarter level as we look into the beginning of '12?

[Kevin D. Schneider:]

Based upon what we're seeing coming in the door right now, I think it's largely been consistent with the numbers you see in the Q4 trend. And I wouldn't expect any material difference on that, at least early on in the year.

[Operator:]

Our next question comes from Jeffrey Schuman with KBW.

[Jeffrey R. Schuman:]

A couple of questions. On the life reinsurance transaction that you're working on in the first quarter, you've talked about statutory gain, but presumably you're monetizing some future earnings. So I'm wondering what the go-forward GAAP earnings impact would look like. And secondly, I think you mentioned the earnings implications of the swap gain, but I didn't quite follow that. So I was wondering if you could just quickly review that for us again, please.

[Michael D. Fraizer:]

Jeff, let me turn that over to Pat Kelleher. Pat?

[Patrick B. Kelleher:]

Yes. With respect to River Lake III, if you look at it from a GAAP perspective, I think we indicated it's expected to result in a GAAP loss of $37 million, which is really net of the write-off of DAC associated with the sale of this business. If you look at it as a sale of business and a release of GAAP capital, it's a sale of about 80% of book value. And that is a good trade, considering that after the impacts of increases in financing costs, there's a relatively low level of GAAP earnings that's been emerging from this block. On average, we see it as a mid-single-digits per annum GAAP earnings give-up associated with a sale. So from our perspective, the capital generation and the impact on shareholder value is very positive.

[Jeffrey R. Schuman:]

Mid-single-digits, millions of dollars of earnings, is that what you said?

[Patrick B. Kelleher:]

Per year, yes.

[Jeffrey R. Schuman:]

Per year, so some number, $4 million to $6 million something.

[Patrick B. Kelleher:]

On average, yes.

[Jeffrey R. Schuman:]

On average. So the stat gain is a pretty big multiple of that. Okay.

[Patrick B. Kelleher:]

That's exactly right. I'll turn it over to Ron for your question on the swap gains.

[Ronald P. Joelson:]

Yes. What I referred to with respect to the $20 million relates to the proceeds of the swap unwinds. Those proceeds can be reinvested, and the reinvestment effect is a $20 million run rate for the U.S. life companies. That does not include the amortization effects of OCI in our swap program. And we'll be covering that piece along with, really, the entire picture when we do the 11

[Operator:]

Our next question comes from Joanne Smith with Scotia Capital.

[Joanne A. Smith:]

Yes, I have 2 questions, 1 is for Kevin with respect to the wind-down of the HAMP program and what you see going on in Washington with respect to additional actions to work through loan modifications and, obviously, the backlog of foreclosures. And that's my first question.

[Kevin D. Schneider:]

So let's start with that one, Joanne. That's a mouthful in itself. I think the -- the latest thing around HAMP I would view as net positive for the Mortgage Insurance industry. The HAMP program has been extended for another year. There's been additional flexibility provided around debt-to-income levels to qualify, which will bring more potential borrowers to the modification program potentially. Investor properties are available. So those things are all sort of net-positive to us and, I think, should give us some additional run room on HAMP, which we thought was really sort of declining and petering out by the end of the year. The government has also offered some additional incentives by the treasury to investors who would write down and do some principal reductions. So far, none of that's really been taken up by the GSEs. And so I don't know that we'll get any additional benefit out of that, really. But there's a lot of activity going on in Washington on trying to make sure you stay focused on the borrowers. The big huge refinance program that was offered up by the administration this week doesn't really -- the GSEs and the agencies don't qualify for that, so I don't think we'll get a lot of benefit out of that, as most of our portfolio is with both Fannie and Freddie. And I think that one's got a little bit of political headwind it's got to play through before those things get approved. But a lot of activity. We're staying focused on the activity that we've known has worked, which is keep working with those borrowers and with the servicers to try and drive as many workouts as we can.

[Joanne A. Smith:]

And Kevin, just on the loss-mitigation savings that you realize, how much of those were directly related to efforts around HAMP? And where do you see mitigation savings going in 2012?

[Kevin D. Schneider:]

Yes, most of those savings for us were driven by -- think of it this way, it's any rescission-related savings, any workout-related savings and then any claim settlement savings, really, that we -- or short-sale type things that improve what our otherwise loss position might be. As -- this year, it was -- again, we had about 567, something like that, million dollars in savings directionally, I think. We'll talk about that on the next call. But at the highest level, it's sort of $300 million to $400 million worth of anticipated savings next year, most of it coming from -- continuing to come from modification, whether they're HAMP mods or some other type of mods outside of the government's HAMP program.

[Joanne A. Smith:]

Okay. And then, just do you see that curtailments could potentially offset the reduction in mitigation savings?

[Kevin D. Schneider:]

Well, there will be some improvement potentially, vis-à-vis curtailment. We don't have a lot of rescission-related savings anymore in our numbers, and really didn't this year. If that's what you mean, I think there might be a little -- a little bit of offset there. But again, we're just trying to make sure we're only paying claims -- paying all the claims that are owed and paying them in accordance with our master policies.

[Joanne A. Smith:]

Okay. And Pat, a question for you with respect to the market conditions for potential block sales on the Life Insurance business.

[Patrick B. Kelleher:]

Sure. We have found in the course of the work that we've done today that the portfolio reinsurance market is alive and well. I mean, that's the market that we tapped for our first transaction. We're actively working on the follow-on transactions and don't really have anything material to report at this time, so we'll look to update you on future calls.

[Operator:]

Our next question comes from the line of Thomas Gallagher with Credit Suisse.

[Thomas G. Gallagher:]

Just wanted to follow up on how the mechanics of unwinding the forward-starting swaps works. And I ask because if I recall correctly, that was predominantly used to hedge your long-term care liabilities. I'm just curious how that interplay works. Are you now less hedged against long-term care when you monetize that forward-starting swap? Or is it just changing the geography of it? Can you talk a little bit about how that interplay works?

[Ronald P. Joelson:]

Sure. Tom, this is Ron Joelson. I'll take that one. So essentially what we do, what we have done with the forward-starting swap program is we locked in or monetized some of the gains that were existing in the program, but we restruck the swaps. And the reason we did that is we felt that we still needed additional protection should interest rates fall further. So we have, in fact, restruck those swaps, and you'll even see if you look at our disclosures, you'll see that we have continued to have -- enjoy gains on those swap positions, mainly because rates fell somewhat even afterwards. So we have exactly the same or approximately the same notional swaps outstanding today as we did before we undertook the unwind.

[Thomas G. Gallagher:]

Got it. And then so, Ron, is it fair to say since you recognize the gain that you just got different strike prices, or the swap is more expensive, or how should we think about that?

[Ronald P. Joelson:]

Yes, you have it right in the sense that we now have strike prices, or we have effectively lowered the protection point. And as I said, because rates fell a bit further, we continue to have gains, close to $500 million of unrealized gains, that continue to sit in the other income or derivative section of our disclosures of the balance sheet.

[Thomas G. Gallagher:]

Got it. And then, can you just talk a little bit about how kind of year end process went for "low interest rate related" pressure on the Life Insurance business on a statutory basis with cash flow testing? Did you -- how did you come through that? And do these hedges have a meaningful impact for you there?

[Patrick B. Kelleher:]

This is Pat, I'll take it. Hedges, of course, have a very meaningful impact on cash flow testing in terms of the margin analysis that we've had. We haven't completed the process for all of the life companies at this point in time. But I can say that based on the interim results, we feel very good about where we are.

[Thomas G. Gallagher:]

Okay. And then just lastly, as we think about just your capital management, you look at holding company debt, consider the Australian IPO. I guess the one thing that I'm wondering is when you look at potentially monetizing a piece of the Australian business and using the proceeds to perhaps buy back stock, maybe a portion to retire debt, I presume that's going to reduce the ongoing cash flow coverage when I think about it from an interest-coverage standpoint, just because, at least to date, the Life Insurance business generates GAAP earnings but hasn't been generating stat earnings. And I appreciate that you guys are monetizing some gains on the statutory basis, and that's good that you're building capital. But is there any -- beyond that sort of capital build, is there visibility on cash flow recovery or statutory earnings improvement on a more sustained basis?

[Michael D. Fraizer:]

Tom, this is Mike. Let me break it down on a few fronts. Because I'd like to start statutory and move -- at the operating company level and then move towards the holding company and your redeployment question, trying to give you as thorough an answer as we can. First on the statutory side, as we've laid out and we're going to lay out in quite a bit more detail on the second call today, in fact, providing you some exhibits that I think the investment community will find very helpful to see how we're thinking about statutory earnings, unassigned surplus and the path towards both improvements on both MSI and surplus in the stat [ph] front and how that results, then, in the common dividend, you'll see a roadmap, if you will, on that front. So we're very focused on that. And that's really an underpinning, because if you look at it, we've had good dividend flows -- well, good capital generation and then subsequent dividend flows, from the International Protection business. We have it from our non-insurance business, Wealth Management, and then reestablishing that on the U.S. life side, all aids what comes up through the Insurance and Wealthy Management division. And then, again, out of Canada and Australia, we've seen good capital generation and dividend performance along with that. So those statutory and capital-generation underpinnings are the foundation. When you get up to the holding-company level and you think about the risk buffers we have, as Marty laid out, we're running about $400 million above our 2x debt-service-coverage cushion we want to have. And then what we do is we basically look at a stressed environment and say, "What would happen if the bulk of your dividends didn't come up from your operating companies for, say, 18 months because of some macro event out in the environment, and what type of buffer would you want to have to be able to handle that?" And that would equate to about -- let me talk about that risk buffer, about $300 million. So that's a way to think about that, and, hence, Marty's commentary. Now as you move over that, because you still have the mixed up [ph] dividend that Marty talked about, we still have the closing of the GFIS sale coming, we have the minority IPO of Australia that's moving down the track right in accordance with our plans. And you look at, therefore, additional amounts, you'd say, "What -- how would you think about those proceeds?" Well, first, you'd look at the environment and say, "Did something change from the risk environment that changed your perspective?" on that risk buffer I just laid out. Second, there would be what I'd say would be a proportional deleveraging. And if you do a proportional deleveraging for a piece of a business you sell, then you're protecting your coverage ratios and then you're protecting your leverage ratios within that 24 to 26 range that Marty talked about, and then you move to redeployment. So it's quite rigorous, statutory, looking at dividend, going to the holding company, making sure we have the risk buffers, targeting redeployment because we see shareholder value creation in that redeployment but maintaining the appropriate coverage and debt ratios along the way. So sorry for the long explanation, but hopefully that's very helpful in seeing how we'd walk down that path.

[Operator:]

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