Genworth Financial Earnings Call Nuggets: Targeted Debt to Total Capital Ratio and Holding Company Cash

On Wednesday, Genworth Financial Inc (NYSE:GNW) reported its third quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Targeted Debt to Total Capital Ratio

Sean Dargan – Macquarie: I have a question about your targeted debt to total capital ratio. I mean, you mentioned the medium-term goal is 20% to 22%. That’s a bit higher than I think the 18% to 20% you talked about last quarter. How long will it take to get to that medium-term goal and what steps will you take to get there?

Martin P. Klein – Acting President and Acting CEO; SVP – CFO: Sean, it’s Marty. As we look at how we project out our earnings and look at the debt ladder and how it matures, we think that we sort of move into the 21% to 22% range in about three years from now. That assumes that with the $600 million maturity in 2014 that (we’d only really) refinance about $250 million of that at some point in time, and the rest of it really comes from the delevering that happens along the way and as well as the retained earnings. So it really is going to take about three years to get to that 21% to 22% range. Then obviously as we generate capital from some of the things that we talked about earlier that would obviously give us the opportunity to accelerate that.

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Sean Dargan – Macquarie: Just one follow-up about the Australian partial IPO, what has changed to push it back another back half of the year I guess? What changed in the Australian market that led you to push back the timeframe?

Kevin D. Schneider – EVP – Genworth; President and CEO, Global Mortgage Insurance Division: As you think about our performance down there, we feel good about our return to profitability and the stability that we’ve seen for now a couple of quarters in our results. I think what continues, not so much to change but to evolve down there is some of the capital pressure from regulatory capital standpoint and basically the regulator in this environment as Marty mentioned in his opening remarks, the regulators are cautious in these markets right now. The other thing that that I think we all need to be cognizant of is just what’s going on in the overall market for IPOs in Australia. There has simply been no material IPOs of any size done on that market this year and so I think there remains some uncertainty in that market regarding just the stability to the tap into the market from that standpoint. We do remain committed to a partial sale. I think the thing that’s most change was so as we think about it is, is we’re going to do when it makes the most sense for our shareholders and our view at this point in time is that our valuations should improve in that market as we move towards the end of the year. (Operating) performance, subsequent quarter of improving performance will continue to help that. We’ll continue to help the valuation improvement and again that that’s one we’re targeting at this point because we think it will be the one that will generate the best outcome for our shareholders.

Holding Company Cash

Jeffrey Schuman – KBW: I was wondering if you could help us just (indiscernible) a little bit on the holding company cash numbers. I think you said pro forma for the $375 million that goes to the opcos, (hopefully) would have about $1 billion. Then I think you said you would end the year around that level, but there would also be some dividends this quarter, so I wasn’t sure if there were some uses for those dividends or how we can (absorb) that arithmetic?

Martin P. Klein – Acting President and Acting CEO; SVP – CFO: We’re at right around our liquidity targets at end of the quarter, maybe just barely in excess of it, once you adjust for that $375 million that will go down to the operating companies, mostly the life companies during the fourth quarter. But in the fourth quarter we have a few different things moving. We do have some dividends coming in, but we also have debt service that’s going out the other way. So with our projections we kind of assume that will all land at around $1 billion by the end of the year.

Jeffrey Schuman – KBW: And just one other thing if I may. Long-term care continues to have some issues around performance of the legacy block, but there was a reserve release this quarter, which I guess (made for) technical reasons. That seems kind of counterintuitive. Can you kind of help us understand the nature of the reserve release please?

Patrick B. Kelleher – EVP – Genworth; President & CEO, Insurance and Wealth Management Division: This is Pat Kelleher. I’ll be happy to do that. We are nearing the completion of our implementation multi-stage update of the reserving system. What we did complete in the third quarter was claim reserve updates, and we actually had some reserve adjustments, some components of the reserve increase like on certain facility claims, other components of the reserve decreased because we found that the reserves were redundant. So the first thing that’s important there is in that component of the changes, we found that our reserves were approximately right in aggregate and our total claims reserves was sufficient so it didn’t changed materially. We did have on about $15 billion of active life reserves we’re holding on that business instead of minor adjustments, which resulted in a favorable impact to earnings of $29 million after-tax and we do not expect material impacts as the remaining work is completed. We also did some work updating our GAAP loss recognition testing and our stat reserve adequacy analysis and consistent with earlier periods, we’ve concluded our reserves are adequate and appropriate. So it made sense to make the technical adjustments. Does that help?

Jeffrey Schuman – KBW: That helps. Thanks a lot.

A Closer Look: Genworth Financial Earnings Cheat Sheet>>