Genworth Financial Inc (GNW) 2015 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Genworth Financial's third-quarter 2015 earnings conference call. My name is Mar and I am your coordinator today.

(Operator Instructions)

The conference is being recorded for replay purposes. Also we ask that you refrain from using cell phones, speakerphones, or headsets during the Q&A portion of today's call.

I would now like to turn the presentation over to Amy Corbin, Senior Vice President of Investor Relations. Ms. Corbin, you may proceed.

Good morning, everyone, and thank you for joining Genworth's third-quarter 2015 earnings call. Our press release and financial supplement were released last evening, and this morning, our earnings presentation was posted to our website and will be referenced during our call. We encourage you to review all of these materials.

Today you will hear from our President and Chief Executive Officer, Tom McInerney, followed by Kelly Groh, our Chief Financial Officer. Following our prepared remarks, we will open up the call for a question-and=answer session. In addition to our speakers, Kevin Schneider President and CEO of our Global Mortgage Insurance division; Dan Sheehan, Chief Investment Officer; and David O'Leary, our President of our US Life Insurance division will be available to take your questions.

During the call this morning, we may make various forward-looking statements. Our actual results may differ materially from such statements. We advise you to read the cautionary notes regarding forward-looking statements in our earnings release and related presentations, as well as the risk factors of our most recent annual report on Form 10-K and our quarterly filings on Form 10-Qs as filed with the SEC.

This morning's discussion also includes non-GAAP financial measures that we believe may be meaningful to investors. In our financial supplement, earnings release, and investor materials, non-GAAP measures have been reconciled to GAAP where required in accordance with SEC rules.

Also, when we talk about the results of our international businesses, please note that all percentage changes exclude the impact of foreign exchange. And finally, references to statutory results are estimates due to the timing of the filing of the statutory statements. Now I will turn the call over to our CEO, Tom McInerney.

Thanks, Amy, and good morning, everyone. Today, my remarks will cover three areas: first, a recap of Genworth's strategic priorities; second, actions taken to date; and third, my views on third-quarter results. I will then turn the call over to Kelly Groh, our new CFO, to provide more details on the quarter results, in addition to addressing liquidity and capital management.

Before I begin, I would like to acknowledge Marty Klein, our departing CFO, as he accomplished much during his years with the Company, including developing many executives on the Genworth finance team. We had three or four well-qualified internal candidates to consider for his replacement as CFO. However, Kelly was an ideal candidate to step into this position at a critical time.

She had been with GE and successor companies for almost 20 years and with the Company since prior to its 2004 IPO. She served as our controller and principal accounting officer for the last three years and she has a deep knowledge of our internal structure, GAAP and statutory accounting, and our financials. She has been working closely with Marty and has been instrumental in recent moves to strengthen our financial position.

On that note, I want to thank Marty for being a good partner and advisor to me and for his years of steadfast service and commitment to Genworth and all of our stakeholders. Marty was a key member of the senior Management team, an exceptional leader to our many employees, and a key contributor in the establishment of our core strategic priorities, which have not changed. We wish him well in his new role.

As you know, since July 2014 I've been responsible for running the day-to-day operations of the US Life division, in addition to my role as CEO. I'm pleased to announce today that we recently appointed David O'Leary as President of the US Life division. In that role, he will take over the daily responsibilities for managing our life, annuity, and LTC businesses.

David has over 30 years of experience in the insurance industry and has held leadership roles at Aetna, MassMutual, AIG American General, and Access Financial. David has been initially focus on the commercial front, seeking to rebuild relationships with distributors, given uncertainties sparked by downgrades to the Company's ratings and our strategic review.

Additionally, he has been and will continue to be active in our efforts to bring the cost structure of both US Life and headquarters in line with our near-term commercial expectations. He is with us today and will be happy to address questions.

With these management changes, I will now focus my attention on driving Genworth's overall strategy, including the implementation of our strategic priorities and obtaining significant LTC premium rate actions, including changes to the existing regulatory model. Our strategic priorities remain to strengthen our core businesses, simplify our portfolio businesses, and increase our financial flexibility.

As denoted on slide 2, we have made progress against these strategic priorities by, first, achieving early USMI compliance with PMIERs, including working to establish a prudent capital buffer. Second, working to generate capital from low-return businesses through divesting the lifestyle protection business, selling select blocks of term life insurance and the recently announced sale of our European mortgage insurance business. These transactions are on track to close in the fourth or first quarters. Third, reducing our stake in Australia to 52%, and fourth, continuing to fix LTC legacy block issues by aggressively pursuing substantial premium rate increases and reducing tail risk and advocating for regulatory change.

With regards to PMIERs, we have executed our third excess of loss reinsurance transaction, covering our USMI's 2015 business. The deal, which is still subject to GSE approval, would provide approximately $225 million of capital credit, and similar to our previous XOL treaties, is priced and a cost to capital in the mid-single-digits. Year-to-date, that would bring total PMIER capital generation close to $725 million, with the reinsurance portion reducing 2016 premiums by roughly $20 million.

Stepping back, the reinsurance market has a clearly proven to be an attractive source of capital, and as conditions warrant, may continue to be leveraged as needed. Additionally, in September, S&P raised the financial strength ratings of our two primary US mortgage companies to BB+, reflecting the improving financial profile and strategic importance of this business.

Today, given ratings pressures and our dependencies among our subsidiaries, our ability to take more substantial steps to simplify our business portfolio is limited in the near-term. However, we are taking steps to reduce certain complexities within our business, such as with the planned repatriation of LTC business. As we make progress with regulators and other key stakeholders in the future, we will discuss that progress with investors in the market.

We continue to act with urgency and are doing what is feasible and prudent for the Company and its stakeholders. While we remain mindful of the importance of our ratings, the rating agencies have placed certain of our subsidiaries on negative outlook, which creates a meaningful risk of a downgrade.

With this in mind, we continue to evaluate strategic options with an eye to accelerate our progress. Until such time as we are able to execute larger transactions, we anticipate continuing to take incremental actions to simplify the business portfolio, which could include additional divestitures of businesses and/or select blocks of business.

Regarding Australia, this business continues to be a solid performer with good profitability, returns, and capital generation. We expect capital management opportunities in Australia to provide significant cash to the holding Company over the next couple of years. And its current valuation, we believe realizing those opportunities is more valuable to Genworth stakeholders than selling more of this business.

Turning to long-term care, we continue to make strong progress in obtaining rate increases to address our legacy LTC blocks and some of the newer blocks. During the quarter, we obtained five additional approvals with an average rate increase of 29%, on $9 million of impacted in-force premium. Since the end of the third quarter, we have received additional approvals covering approximately $190 million of additional in-force premium with an average rate increase of 26%, bringing year-to-date total in-force premium impacted close to $700 million, with an average rate increase of 29%.

The average premium rate approved and the level of impacted premium achieved through the third quarter 2015 remains in line with our 2014 ALR margin assumptions. We continue to expect to see a more meaningful benefit to LTC earnings from these actions later in 2016, as the significant increases approved in 2015 are implemented on policy anniversary dates.

Now let's turn to results for the quarter. Our third-quarter operating results show continued good results in GMI and disappointing results in LTC. I would point to three key takeaways. One, normal seasonal loss pressure in Canada and US mortgage.

Two, underlying LTC performance was in line with expectations, but we made additional corrections, driven in part by our work to remediate the LTC material weakness. Three, adverse impacts in corporate and run-off from equity market volatility on a run-off block of variable annuities and increase expenses in corporate as we increased our legal accruals.

Turning to slide 5 of our third-quarter earnings deck, net operating was $64 million, which is down 46% compared to the prior quarter. While results were down overall, fundamentals remained strong across our global mortgage insurance platforms, as evidenced by year-to-date loss ratios of 20%, 24%, and 36% for Canada, Australia, and the US respectively. We continue to believe our full-year 2015 loss ratios will be comfortably within our targeted ranges.

As you know, Canada and Australia are exposed to energy and mining industries, and those two countries have experienced increased economic pressure due to the declining commodity prices. We've taken actions to strengthen underwriting in the impacted areas on new flow insurance, and while we have seen some loss pressure in these areas, our overall portfolio loss ratio performance remains solid to date. We will likely experience additional pressure from these regions as we move into 2016, and we expect an increase in the loss ratios in both Canada and Australia compared to 2015.

In the United States, housing conditions continue to improve, benefiting from continued improvement in unemployment, historically low interest rates, and high home affordability. Price competition is intensifying in the MI marketplace and now includes pricing pressure within the borrower-paid mortgage insurance products. We continue to assess the market dynamics, intend to remain competitive across price and guidelines within risk return tolerances and with differentiated service levels.

Mortality was lower in US Life Insurance division and had a net favorable impact to earnings in the quarter, primarily from Life Insurance. In LTC, earnings were reduced by $21 million, primarily from adjustments that relate to our efforts to remediate the material weakness. Without these adjustments, LTC earnings would've been up slightly from the prior quarter, reflecting our progress on in-force premium rate actions.

We continue to expect modest LTC earnings, with the potential for quarterly volatility, although we expect some improvement in LTC earnings by the end of 2016 into 2017, as the 2015 approved premium increases are implemented. New insurance [RIM] levels were solid across our three primary mortgage insurance platforms, with Canada, in particular, benefiting from increased market penetration. Sales in US Life continued at low levels as this business works to restore its commercial presence.

Regarding annuities, given the transactional nature of the sale, submits rebounded for this business, and we saw sales increase versus the prior quarter. Additionally, we are evaluating new product and distribution strategies for life and long-term care to grow sales from current levels.

In summary, we continue to make some headway on our strategic priorities to rebuild shareholder value, but there is much more work to do. And now, I will turn the call over to Kelly to provide a deeper overview of the quarterly results.

Thanks, Tom, and good morning, everyone. While we certainly have challenges, I am excited to be in this new role and look forward to updating you as we make progress. Today, I will discuss our third-quarter results and key performance metrics, provide perspectives on our approach to liquidity and capital management, and provide some thoughts on our upcoming fourth-quarter actuarial assumption reviews.

Finally, I will also update you on our progress on the remediation of our material weakness. We reported net operating income of $64 million and a net loss for Genworth shareholders of $284 million for the quarter that included a $296 million loss on the life block sale we announced in September. Overall, our results were lower in the Global Mortgage Insurance division, primary from seasonally higher losses in Canada and the United States.

Results were also lower in the US Life Insurance division, as net favorable mortality experience and benefits from the LTC rate actions were offset by $21 million of adjustments to long-term care reinsurance, premium taxes, and group reserves. We also recorded higher legal accruals and expenses, totaling $17 million after-tax in corporate, primarily related to litigation. Additionally, the decline in the equity market negatively impacted our run-off segment.

Looking at key performance metrics, sequential operating revenue reflects three main drivers. One, earned premiums continued to be favorably impacted by LTC rate actions. Earned premiums were also higher in the quarter from an earnings curve update in Australia. Two, investment income is down slightly from $10 million after-tax from lower limited partnership income, primarily in run-off and fixed annuities. And three, foreign exchange had an unfavorable impact of $10 million pre-tax on the quarter.

Our underwriting results were mixed. Sequentially, the mortgage insurance loss ratios remain solid, but were seasonally higher in Canada and in USMI and up in Australia, primarily related to actuarial updates, which impacted the earnings curve and loss reserves in similar amounts, but increased the loss ratio by 7 points. We still anticipate the loss ratios in Global Mortgage Insurance to end the year within and in some cases at the low end of our previously disclosed ranges.

The loss ratio in long-term care was up from the prior quarter to 76%, primarily from a number of corrections associated in large part to the work related to the remediation of our material weakness. Life Insurance results were positively impacted by improved mortality.

Total operating expenses were up 6% sequentially, mostly in Corporate and Other from higher legal accruals and expenses. As we've communicated in the past, as part of our strategy to increase financial flexibility and strength, our goal is to reduce cash expenses by $100 million or more and US Life Insurance and headquarters to size the business closer to our current sales levels.

We have made meaningful progress implementing expense initiatives this year, absent our legal accruals and expenses. While these cost savings could be partially offset by additional temporary transition expenses to build capabilities and close transactions currently underway, we expect to be on a run rate to achieve our goal in the first half of 2016.

Turning to liquidity and capital, we have made good progress against our goals. Let me highlight examples of that progress and update you on capital levels. First, we maintained solid capital positions in our operating companies. Second, as Tom mentioned, USMI capital as measured under PMIERs, is expected to benefit from a third reinsurance transaction that, subject to approval by the GSEs, will be effective as of October 1. This is helping to achieve a major goal of creating a prudent buffer over compliance with PMIERs.

Third, we received $102 million in dividends from the operating companies, plus the remaining $50 million in proceeds from the sell-down of our ownership to 52% in Australia that was completed in May. Dividends from international MI through the third-quarter totaled $233 million, achieving the upper end of our goal for the quarter.

Fourth, our available cash and liquid assets at the holding Company were approximately $1 billion and represent a buffer of approximately $490 million in excess of our 1.5 times debt service and restricted cash, as well as above our $350 million risk buffer.

And finally, turning to US Life statutory performance, unassigned surplus decreased approximately $20 million sequentially to around $75 million from the unfavorable equity market impacts on variable annuities, in addition to LTC results, mainly due to the corrections that were both partially offset by favorable taxes.

RBC levels in our Bermuda subsidiary, BLAIC, were approximately 305% down from the end of the second quarter, but that entity still maintains capital above Bermuda's minimum requirement. The first phase of the BLAIC LTC repatriation is underway and we expect to complete the repatriation in either 2016 or 2017.

Regarding liquidity and capital management, our guiding principles, which have not changed, are first to ensure that each of our businesses are adequately capitalized at levels we believe are appropriate given the risk. Second, to generate capital through regular operating Company cash flow to the holding Company, selective asset sales, and active management of excess capital in our businesses.

Third, to manager our holding Company debt levels, maturity, timing and cost prudently. Fourth, to maintain strong near-term liquidity. The actions we have taken and continue to take are focused primarily on improving shareholder value. Let me provide a few examples.

First, our US Life Insurance and Mortgage Insurance companies have capital levels above both of the regulatory minimums and our Management target. As a result, the excess capital above the Management target is available to handle stress in areas, and in the near-term, we anticipate liquidity to be sourced from dividends from international MI.

In Australia, we continue to evaluate ways to optimize capital, and announced last night, Australia intends to conduct share buybacks of up to AUD150 million depending on the business and market conditions. It's our intention to anticipate pro-rata to keep our ownership percentage at approximately 52%.

In US Life, we continue to hold capital above our 400% RBC target as a buffer, and given unassigned surplus levels, we do not anticipate receiving capital through ordinary dividends flows for some time. However, the Life block sale we announced in September, the US Life companies expect to utilize all of their net operating losses, which will make the business a taxpayer going forward.

This means that as US Life companies generate taxable income, a portion will utilize deferred tax assets in the system, and will move cash and capital to the holding Company, opening another source of liquidity to the holding Company. Second, we've completed or announced more than $1.5 billion of capital initiatives this year, including executing reinsurance deals to ensure we are PMIERs-compliant, with a prudent buffer to enable us to continue our strong presence in the USMI market.

Selling down our stake in Australia to our current 52% ownership, receiving dividends from both Canada and Australia, and we still anticipate closing the sales of our lifestyle protection business, or LPI, later this year, and Europe MI and life block early next year. We expect USMI to be a contributor of dividends to the holding Company beginning in 2017 or later, but dividends may require regulatory approval.

Third, we are intent on reducing our debt levels over time. The first step in that process is the expected use of the majority of the LPI sales proceeds to fund the 2016 debt maturity. After addressing the 2016 debt, we have no other debt maturity until May 2018, or over 2.5 years from today. Regarding our 2018 debt, while we continue to evaluate which additional strategic actions make sense for the Company and shareholders, refinancing the 2018 debt is certainly an option we would consider.

And fourth, we continue to maintain holding Company cash levels in excess of 1.5 times annual debt service plus a $350 million buffer. We believe we have sufficient liquidity to maintain our cash buffer and meet our cash needs for the foreseeable future. Next, I would like to cover our LTC claim reserve review that was completed in the third quarter, and the margin work that will take place in the fourth quarter, as well as our progress on the material weakness remediation.

During the third quarter, we reviewed our assumptions and methodologies for our LTC claim reserves. Our actual experience in aggregate has been in line with our claim reserve assumptions developed last year and we did not make significant changes to the claim reserves, assumptions, or methodologies other than updates for interest rate levels and utilization rates as we do every quarter.

We will continue to monitor our experience, assumptions, and resulting reserves closely and make changes when appropriate. In the fourth quarter, we will conduct our annual review of LTC and Life Insurance and fixed and variable annuity assumptions relative to current experience and future expectations. This work will include our long-term care margin testing and we will provide more details on our fourth-quarter earnings call.

Before opening it up for questions, let me address the material weakness remediation. We've implemented additional controls within our actuarial processes in both the second and third quarters, and in executing our controls, identified the corrections for LTC that were recorded in the third quarter.

Although we have successfully completed our test of design of the new controls, we do need more incidences of testing the effectiveness of the new controls to finalize our conclusions, and we plan to test the controls again in connection with the preparation of our year-end financial statements. We believe we're on track to remediate the material weakness by the time we file our year-end financials.

To recap, while we've made good progress in several important areas this quarter and believe we have sufficient liquidity for the foreseeable future, we have much work ahead as we focus on improving business performance and achieving our goals.

With that, let's open it up for questions.

(Operator Instructions)

Nigel Dally, Morgan Stanley.

Great. Thank you. Good morning. Just a question on the life block sale. With the capital freed up, should we take it from your comments that all of that capital is going to be retained at the sub level? And under the tax sharing, how much cash would you expect to be paying to the parent annually?

Nigel, in terms of the sale of the two blocks, the capital is $100 million to $150 million and we will have the flexibility to either have it go to the parent or retain into the sub. What was your second question?

Just the amount of the cash coming up from the tax sharing?

Hey, Nigel. It is Kelly Groh. I will take that. We're going to provide more details on that when we get closer to closing the transaction in the first quarter. Obviously, it depends on the tax position of the rest of our subsidiaries and we will be utilizing the NOLs and the other subs subsequent to the closing of the transaction.

Okay. And then a question on domestic MI. For the premium lender paid NIW was up about 64%. I know you've talked about being selective there. It seems like a very large increase, so maybe you could discuss what is driving that increase?

Hey, Nigel. This is Kevin. Overall, we had good growth in the total market, both in the lender paid portion and in the borrower paid portion of the market. We've previously discussed that we will participate in that selectively and there will be quarters where it will be a little bit of lumpy, but we saw some opportunities this time that were good profitable opportunities for us.

The overall change is up probably $500 million overall in terms of the overall growth in the single premium side. So I don't consider it a particularly big uptick. I'm not sure you would consider that as a run rate. It was just some opportunistic pricing opportunities for us within the period and we're going to -- it was frankly within our expectations of where we'd be for the year.

Great. Thank you.

Ryan Krueger, KBW.

Hello, thanks, good morning. I first had a follow-up question on the Life Insurance taxes and inter-Company tax sharing payments [to] the holding Company. I just wanted to clarify, the Life Company will be able to pay taxes to the holding Company to utilize tax position of the overall tax sharing agreement, but won't those payments still ultimately be sent to the IRS or will it actually be retained at the holding Company?

Sorry about that. I'm just trying to make sure that my mic is on. No, they won't. We currently have ample foreign tax credits and net operating losses in the rest of the system, so really what happens is we are utilizing, with this transaction, all of the NOLs within the US Life companies. Then, once those are utilized, those go to cover NOL utilization given that the life, non-life election we did a few years back. So there's no payments to the IRS in the foreseeable future.

Okay. Got it. Thanks. Then I had a question on the holding Company cash usage. Every quarter, you disclose they hold Company net other items, which I assume is primarily expenses. On a year-to-date basis, that number is $219 million. Can you just give us a sense of how you would expect that to run going forward, if this was a fairly normal level at this point or should we expect any changes going forward?

Yes, in our slide we did go through that. And the net other items for the quarter were about $57 million. The thing that I would say on that is we did opportunistically buy back some debt, so that was about $50 million of the total there.

$50 million of the year-to-date total?

No. $50 million of the quarter total of the $57 million.

Okay. Can you give us any sense of an annual basis what'd you typically expect that to be?

Yes. We will continue to opportunistically look at debt repurchases, but I don't have a forecast for you.

Okay. All right. Thanks.

Geoffrey Dunn, Dowling & Partners.

Thank you. Good morning. Just a quick follow-up on the last question. What piece of debt did you buy back this quarter? What maturity?

Geoff, we went across the spectrum, obviously focusing on shorter-term stuff, and we will fully disclose that in the 10-Q when we file it.

Great. Then in terms of the PMIERs, your original range was $500 million to $700 million, now you're up at $725 million. Can you give us an idea of the relative cushion you have over your minimum required assets?

We have continued to assess our PMIERs compliance, really from the beginning, thinking about the buffer we might need. We're probably not going to disclose the relative levels until we get through the fourth quarter and conclude all of our full compliance and repping of that compliance with the GSEs. But this is how I think about it and how it might help you see where we are headed.

There's really two components we think about in our buffer. The first is you have some uncertainty the performance metrics of the business, so the relative levels of NIW, the different mixes of that NIW which have different capital charges associated with it. Where persistency goes. If you're lapse is higher, you may lose some of the benefit of some of the buffers or it may go the other way for you and you may gain some benefits and then ultimately loss volatility.

So on one respect, we have got to account for that in our buffer, and then secondly, because we also have to deal with the actual asset volatility, specifically related to things like FX and stock price variability in our Canadian Mortgage Insurance assets. So those are really be two things we have to account for. Obviously, from quarter-to-quarter, there's been some volatility in both FX and share price for Mortgage Insurance Canada.

Just to give you a sense for what that drove probably from the end of Q2 to the end of Q3 is close to $50 million. Our buffer needs to account for that. That is the type of perspectives we're building in as we think about our buffer. When we get to the fourth-quarter earnings results, we will probably try to find a good metric for you to evaluate that.

Okay. And then the last question, have you followed a couple of your peers with rate increases on the lender-paid singles business and what were the -- I'm sorry go ahead?

No, please. I interrupted your question. Please.

And what were the returns that you priced to this quarter under the new capital requirements on the singles business?

Geoff, we have not filed new increases yet in the single premium card rate pricing. We continue to price our business on a portfolio basis in the aggregate to a low to mid-teens type return level. I've seen a lot of questions around pricing overall, as some of our competitors have gone through the various earnings calls, and we price our business to maximize the returns to our shareholders.

There absolutely is some price competition going on right now, which gets at the root of the question, but it is coming from some of the competitors that have some objectives they are trying to achieve, such as to get to scale. Our pricing is going to be to try and maximize the overall shareholder return. That said, we intend to remain competitive within our risk and return targets, but I'm just not going to discuss our commercial strategies and pricing strategies on the call.

I just don't think it's the right forum for it. Unfortunately, it is not only you that are on the call, but some of our competitors listen. So we will update you -- we are going to follow the market. We're going to remain close to our customers. We provide a fair level of transparency around both our borrower-paid and our single premium pricing that will be available in our QFS.

Okay. Thanks for the comments.

Steven Schwartz, Raymond James and Associates.

Hey, good morning, everybody. First, Kevin, just a quick follow-up to your comments there. The reference to competition in the MI, I'm assuming you are referencing tiered pricing is that correct?

I'm referencing competitive pricing from -- when you said tier pricing. We are seeing it in all of our pricing right now, both the borrower-paid pricing and the lender-paid premium pricing.

Okay. I'll move on to other stuff. Just wanted to make sure. Kelly, could you maybe tell us -- the loss ratio in LTC was up, that was due to some of these remediation efforts. Can you give us a clue as to what that ratio might have been ex what you discovered during the remediation efforts?

Sure. The ratio excluding those would've been about 74% instead of 76%.

Okay. Great. Thank you. And where would you be so far in the run rate of cash savings?

Oh, you are talking about our run rate that we put out there from a target perspective of $100 million?

Right. Yes.

Marty, last quarter said we were on a run rate of about $50 million. I've reviewed that so far and we've made more progress, as we have been really looking at our processes and trying to realign jobs and efforts to maximize that. We feel right now that we are set to really reach that $100 million run rate by the first half of 2016 and so we feel good about what we've done so far and really just are working to size the business based on the current sales levels, as well as really simplified portfolio of [company].

So did you make progress off of that $50 million in the quarter?

We did.

All right. And then just one more. I noted there was actual explicit guidance for Canada MI loss ratio. You said in the comments or in your statements, that you expected both Australia and Canada to be up obviously due to the pressures. Could we assume that Australia might be up as much as what you are thinking Canada would be up in terms of the loss ratio?

At this time, we're still assessing where we think we will be with Australia. There has been some pressure due particularly to some of the commodities pricing or commodities pressure, but I would really say for Australia, we need to wait until we see how things settle out the balance of the year and we will provide that update as we usually do with outlooks on loss ratios across all the platforms in the early part of next year.

Okay. All right. Thank you. That is what I had.

Sean Dargan, Macquarie.

Thanks and good morning. Just sticking to Australia, GMA announced the share repurchase program last night or authorization, and you'll participate in that to keep your ownership level stable. I'm just wondering what the thought process is there because you will, in a sense, be using capital to buy back the shares of that company?

What the thought process of that versus a common dividend increase is and what is the endgame? Is it to get up the share price so that you can exit your ownership stake and use that to address the 2018 maturity?

Sean, Australia has a significant capital levels, and in excess of their management targets, where there is a number of capital management initiatives that are available to the business. You'll see a continued and steady common dividend payments. There has been some level, earlier in this year, in terms of special dividends. There is some limitations on those due to the Franking credits associated with the business.

The share buyback opportunity for the Australian business will come out of their capital base. It's an interesting time to do that, given where the share price is trading, which is significantly below the book value of the business. So there's a number of different opportunities. We are going to work to continue to manage and optimize that capital. If we get some share price improvements, that will certainly be helpful along the way, but there's a number of opportunities there, and maybe Tom has some additional comments on that.

I would say, Sean, as I said this in my comments, given where the current share price for Australia is, we it's a very good time for GMA to be repurchasing its shares. We don't think it makes sense for us, at the current valuation, to sell any of our 52% position. We also believe that it will be, as it has been, a good generator, both of ordinary dividends, opportunities for special dividends, and future share repurchases depending on how the business goes.

Therefore, I think it makes sense to participate in the buyback and we won't be a seller at the current valuation. We will see how things play out and if we do get an increase in the share price significantly, we will reconsider our ownership position.

And just to add one final thing to it, Sean, this is obvious, but just in case it is missed, the holding Company will benefit from our participation in the buyback. So Genworth Financial will get some of the proceeds associated with the maintenance of our 52% share position as we go through that buyback process.

All right. Got it. And just switching to Life Capital, unassigned surplus contracted a bit, which was in part due to the equity market movements and what that did to your variable annuities and run-off. But in the past, we've been asked to focus on unassigned surplus. I assume some of the capital that is going to come back from the Protective Life transaction will help RBC and unassigned surplus, but is that something we should be focusing on in the near-term, is it really as important right now?

Sean, this is Kelly. The way that I look at it, you are right, really the equity markets impacted unassigned surplus. We really don't anticipate the US Life company to be a dividend payer in the near-term, so we are trying to managed it to a 400% RBC and unassigned surplus probably is a metric that manages dividends, but we really don't anticipate to extract dividends in the near-term.

Okay. Got it. Thank you very much.

Suneet Kamath, UBS.

Thanks. Good morning. I wanted to follow up on Ryan's question about the hold Co, net other items. This number has been moving around quite a bit, but if I just track it so far this year, it is quite a bit higher than last year. In some quarters, it's actually exceeded the interest expense.

I don't know if this is a question or more of a request. It would be helpful, given so many of us are focused on holding Company cash, to really get a sense of what is in here. Then Kelly, you were asked for a forecast, which I don't think you were able to give.

But I really encourage you to rethink that because, to the extent that this number is moving around a lot, it really can have a significant impact on the cash position. And it calls into question whether that 1.5 times interest coverage number is enough, particularly in quarters when it exceeds the interest expense. So I just wanted to get some thoughts there.

We will acknowledge your input and consider giving a forecast in the future.

Okay. And then, Tom, for you, we've been on this consistent track over the past couple quarters of talking about $1 billion to $2 billion of debt reduction, so I was a little bit surprised to hear the comment earlier that you are thinking about potentially refinancing the 2018 debt. Obviously, that would move us off that debt reduction. What is going on in terms of your thinking around that?

Suneet, we still look at the $1 billion to $2 billion as a firm target for debt reduction. Let me tell you the principal driver of that $1 billion to $2 billion is because we do want to increase the optionality for the Company. We do think that with the debt at its current levels -- it will come down because we will take care of the 2016 with the proceeds from LPI, but we do think by getting the debt down of that range of $1 billion to $2 billion, it allows us to look at strategic options that we cannot look at or aren't feasible without doing that.

So that is still the focus. What Kelly said is we have a number of levers to use to reduce that and we've done the LPI deal, the term life blocks. We are continuing to look at other life annuity blocks, the amount of [e-deal]. Kelly just meant that one of the options we have for the 2018 maturity would be to refinance, and I'm not saying we will refinance it but it is an option. That is all she meant by that.

Okay. Then on the active life reserve review in the fourth quarter, you said you're be looking in all of your assumptions, but I just would note that there are some comments out of Moody's around it becoming more difficult to be get price increases approved by the regulators, and given that is such an important component of your active life reserve, does that play into your thinking around what you've built in terms of that reserve, i.e., the Moody's commentary?

I don't want to comment on Moody's. I will say, and I mentioned this in my remarks, we've made very strong progress in premium increases. Year-to-date, we have received on average 29% increase and $700 million in premiums and you don't see that yet because obviously that, let's call it, rounded to $30 million and $700 million will come in on the anniversary dates going forward.

So we are making very good progress on premium increases. We are right on track. I know a lot of investors questioned -- our target was $500 million at its peak and $5 billion net present value, but we are right on track with that. So I am very pleased with how we are doing. As I have said in the past, and I said today, it is one of my key priorities personally is to work with Elena Edwards and the team with the regulators.

That is all going very well. We continue to spend a lot of time with individual states, with the NAIC, with a number of key regulators who are focused on long-term care, and I do believe that they agree with us, that you need to give us increases on the [old] blocks to break even. We're making very good progress on that.

Suneet, let me add one more thing to that. We are currently working on our margin testing. We will finish that in the fourth quarter and definitely provide a lot more details on the fourth-quarter earnings call.

The one thing that I did want people to remember, though, is last year we did unlock our P GAAP block because we did have to test our P GAAP and our direct written business separately. Since we unlocked that, it has no margin. It will be more sensitive to adverse changes, but it is less sensitive to interest rate. It is also less -- it benefits less from rate increases, just given the age of the business.

Okay. Thanks.

Scott Frost, Merrill Lynch.

Hi. Thanks for taking my question. Just a couple of things. What is the unassigned surplus of GLIC at Q3 right now?

We've got that in our slides. It is about $76 million.

Okay. The question -- I'm trying to piece it all together with the debt guidance. A couple of things. USMI pays dividends, you said, probably 2017. The long-term care premium is in force, but no expectations of dividends from GLIC by 2018. That is what it sounds like.

I'm trying to figure out how long is near-term, when you say they are not going to be a near-term payer. The reason I ask is it looks like your liquidity might be challenged if they don't start paying dividends to the hold Co at some point. Is that the right read?

Scott, what I would say on that is that was one of the reasons we did the Life block transaction is, frankly, that ate up all of the -- or that will eat up all of the NOLs in the life companies. So even though we're not planning on necessarily taking explicit dividends out of the Company, it will help holding Company cash to pay for accumulated NOLs related to the past debt payments as the life companies earn taxable income over time.

Got it. Okay. Okay. You talked about the refi, the 2018s, as one potential option. I'm curious as to how you think you would do that. What capital markets options do you see as open to you?

There's obviously a high yield market that is available. When you look at where our debt is trading right now, you could do a five-year issuance around an 8% coupon. We have got 2.5 years really to make that decision, and a lot of time to evaluate the best options for our bondholders and our shareholders.

Okay. Great. I just wanted to ask last one. Could you remind us -- I want to make sure I understand. There is an inter-Company reinsurance arrangement regarding long-term care. Is it Brookfield Life or Brookfield Life and Annuity? What I'm getting at is, you said you are unlikely to sell more of GMA AU.

But if you were to do that or sell Canada, would proceeds be available to the holding Company? More specifically, if you had some adverse experience in long-term care, would the arrangement require you to pledge additional blocks of those two entities to support the reinsurance arrangement?

Scott, this is Kelly. One of the things have talked about in the past is the desire to repatriate that business. That's still a goal of ours, to repatriate from Bermuda, the long-term care business. We think it adds transparency and it likely would be credit positive.

We've evidenced that we've been able to bring capital up through our Bermuda subsidiaries, as we obviously we talked about what we got from Australia this year. So I'm not necessarily concerned about that at this time, but just it still is a goal of ours to do the long-term care repatriation either in 2016 or 2017.

Okay. And just to be clear, the repatriation would -- there would be no encumbrance anymore, if there is one now on any of the other stakes that you have in international MI. Is that accurate?

Yes, that is accurate.

Okay, great. Thanks for taking my questions and congratulations on the new position.

Thanks, Scott.

Ken Billingsley, Compass Point.

Good morning. Thanks for taking my question. I had a few long-term care questions here. From the press release, you talked about that a higher mix of new claims with higher average reserves, I think that's multiple quarters that's come through. Does this mean that in the future, that this is going to decline, as it seems like there's a mix of new claims that actually have lower average reserve expectations coming in and that there should actually be an improvement at some point in the future?

We reset our assumptions last year as a part of our disabled life reserve, so we look at our utilization and update that on a quarterly basis. I'm not concerned with the claims trends we're seeing right now. They are as expected and they're what we are really building our rate action plans to address. In terms of, as we put on new claims, we obviously put those on at the higher factors on a per claim basis, and really the development we saw in the quarter was consistent with our expectations.

Then my understanding was these claims that were coming in, that there was a higher percentage that had higher average daily amounts than what a normal mix would be. Is that wrong?

No, you are right. As we see the aging of the business, that is automatically going to transition that way because we have more policies that have benefit inflation options and higher average mix. But as we updated our factors and we update utilization on a quarterly basis, you'll see that normalize.

Okay. So you've already built the expectation that there's a number of policies with lower daily amounts that are going to flow in and that is built into the numbers as of today.

Absolutely.

Okay. And the favorable impact of $19 million from rate increases and reduced benefits, how much of that was one-time related to reduce benefits?

We break that out specifically on the slide. So you see there's about, of the total of $64 million in the quarter, $27 million related to reserve changes and about $42 million related to ongoing premiums. So the delta from last quarter was really a $12 million pre-tax increase.

Okay. I see that is on slide 13. The last question that I have is, this is looking a little bit historical, at one point you had talked about long-term care pricing increases. In some of the states, there is going to be multiple-year process, and the discussion with the states was they understood what you needed, but they wanted you to come back over a couple of years. Regarding those states, how have the actual results of going back to them matched up with the original expectations when you first left their offices.

I would say a few things on that. One is all of the states are different, so there are -- it is around 20, a little over 20 states that have given us the full increase all at once. Then the balance of the states, some of that balance give us the full increase but spread it out over three years or five years and then some give us the increase for a year and say come back each year. So it really depends on what state you are talking to.

I will say, I've doing this now for going on three years. I will say there is a marked change in the view of all of the regulators, including the regulators that traditionally have been more challenging on rate increases, that they have to give these premium increases that are actuarially justified to allow us to get to break-even. The regulators now -- there is a bankruptcy in Pennsylvania, Penn Treaty, they've learned a lot from that, that these increases are important.

So I do think that's compared to two or three years ago to today, there is a much more open view on the part of regulators that they really do have to step up. These are politically difficult to do. They gets complaints. We get complaints. But in the end, that they are much more supportive than they were.

We are still seeing generally that consumers, while no one likes these increases, we are still at about 87% to take the full increase and in the balance take either or reduce benefit or the non-forfeiture option. So things are going to continue to go well with regulators, and I do think -- so maybe I disagree with the Moody's perspective-- they are more open today to it in a significant way than they were two or three years ago.

And do you have an idea of what the percentages that take the reduce benefits?

Today, it's about 87% that take the full increase. It's 8% or 9% that take a reduced benefit. And it's about whatever that difference is, the net 5% or so that take the non-forfeiture option. So they have a paid-up policy with claims equal to the premiums they've paid to date.

Great. Thank you for taking my questions.

Ladies and gentlemen, I will now turn the call back over to Mr. McInerney for closing comments.

Thank you, Mar, and thanks to all of you for your time and your questions today. I just want to summarize to say we remain focused on our strategic priorities. We have a strong Management team and we're pleased to have Kelly stepping into the CFO role and you seen some of her talent today on answering all of your questions. In addition to a good Management team, we've got talented and dedicated employees.

We continue to a focus on rebuilding shareholder value. We're doing all we can in terms of priorities to implement those that add value and are feasible, but we're also staying true to our mission, which is to help families achieve and maintain the dream of homeownership, as well as helping families with funding solutions for their long-term care needs. So with that, thank you very much, and we look forward to the next call in early February.

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