Genworth Financial Inc (GNW) 2004 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Genworth Financial third-quarter 2004 earnings conference call. My name is Steven (ph), and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session toward the end of this conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Ms. Jean Peters, Senior Vice President, Investor Relations and Corporate Communications. Please proceed, ma'am.

Thank you, operator, and welcome, everyone, to Genworth Financial's third-quarter earnings conference call.

Our press release and financial supplement were both released yesterday afternoon and are available, along with the slides that will be used in this morning's presentation, on our Web site, www.Genworth.com.

This morning, CEO Mike Fraizer will discuss highlights of our operations and CFO Rick McKenney will take you through net operating earnings and Pro Forma operating results. Also on hand for the call are Tom Mann, President and CEO of Mortgage Insurance, Pam Schutz, President and CEO of Retirement Income and Investments, and George Zippel, President and CEO of Protection.

Please note that we will be focusing our comments on Pro Forma operating results. This Pro Forma view is presented in accordance with all SEC guidelines for providing comparability in the results after reflecting the impact of our separation, reorganization and reinsurance transaction.

In regard to forward-looking statements and the use of non-GAAP information, prior to joining this call, you were asked to read and agreed to your understanding of caveats in regard to forward-looking statements. If you did not do so, please disconnect at this time, but I will repeat the caveats as follows -- during this presentation, we will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These include statements regarding our outlook for future business and financial performance. Forward-looking statements are based on current expectations and assumptions, and actual results may differ materially. For more information on factors that could cause actual results to differ, please refer to risks listed in our recent registration statement filed with the SEC. We do not undertake any duty to update any forward-looking statement.

This presentation also includes the use of non-GAAP financial measures that we believe may be meaningful to investors. Non-GAAP measures have been reconciled to GAAP in accordance with SEC rules, except in the case of forward-looking statements such as guidance. You'll find reconciliations and other information regarding non-GAAP measures at the end of this presentation, as well as in our press release and in the third-quarter 10-Q that is forthcoming.

With that, let me now turn the call over to Mike Fraizer.

Thank you, Jean. Good morning and thank you for joining us.

With Genworth's first full quarter as a publicly traded company under our belts, I'm pleased to report we achieved several interim milestones.

Starting with earnings, third-quarter Pro Forma net operating earnings of 55 cents per share drove nine months operatings earnings per share up nearly 16 percent compared to 2003 Pro Forma. We are on track for more than 20 percent Pro Forma net operating earnings per share growth for full year, 2004, based off 2003 Pro Forma net operating results. We expect to achieve 10 to 12 percent operatings earnings per share growth in 2005.

Second, we continue to optimize our business mix in two ways. We are accelerating growth of higher-return product lines and we're driving run-off of underperforming blocks of business or distribution relationships. Progress on both fronts can be seen in our results.

Starting on the growth front, we had positive sales movements in term life, fixed annuities, the income distribution products and globally in mortgage insurance and core payment-protection products in Europe. These products are key to Genworth's long-term value proposition to provide solutions to consumers' protection and retirement-income needs while enabling homeownership. We are also seeing signs of stabilization in long-term care sales, as our repriced product is now out in most states. Long-term care sales trends may remain uneven until we have transitioned to new pricing in the last few states where we've just gotten approvals.

In the global arena for mortgage insurance, we continue to penetrate key customer relationships in Canada, Australia and Europe. As a result, we are offsetting the impact of the slowing Australian housing market, where the Reserve Bank has acted to raise interest rates, with deeper customer penetration. We are also shaping our business mix using the run-off side of the equation. Sales have all but evaporated in the low-return payment-protection contracts we chose not to renew, while the business we find attractive in Europe is growing nicely. Average Assets Under Management in our institutional lines declined 6 percent, due to the gradual run-off of old fixed GICs as well as the deliberate reduction of floating-rate funding agreements.

Third, we're working hard to give additional transparency into our numbers and value drivers. We are pleased to be conducting our first full service earnings call with both a detailed press release and financial supplement released yesterday afternoon. Now, in contrast with last quarter, we used a two-step earnings release and discussion process to enable you to have the detailed financial supplement at the same time as today's call while meeting the reporting requirements of our majority shareholder.

Last month, we held our first investor teach-in on our global mortgage insurance business for more than 100 investors, and we plan to continue similar programs in the future, as we're committed to clarity in describing our strategies, operations and Risk Management disciplines. We will talk about some of our sales data today in more detail than we did in the second quarter. That data will be incorporated into our financial supplement starting in the fourth quarter.

Also, please note that Genworth will hold its first strategic update for investors here in Richmond, Virginia on December 15.

Turning to highlights of our operations, we saw solid growth in product lines with higher-return characteristics. In Retirement Income and Investments, Pro Forma operating earnings grew to $42 million from $15 million in the prior year. Of that, $14 million was due to higher Assets Under Management and wider spreads in fixed annuities. We also had $7 million more in fee income, primarily from contracts to manage business for GE.

Protection earnings were up just 2 percent. That reflects the loss of tax favorability in payment protection, as well as the shift of $250 million of excess capital from the long-term care line to the corporate segment. Protection results were up 7 percent without the tax and capital items.

We had good success in Life products, which were up 17 percent over the prior-year quarter. This is where we are writing new term insurance with high-teens return on equity. Mortgage insurance results grew 10 percent, driven by the 19 percent increase in international mortgage insurance.

Now, let me touch upon a few sales highlights that demonstrate how we are growing these higher-return line. Growth of our income-distribution series products doubled over the prior year to $70 million, largely due to a combination of new income products and a great deal of hard work to expand producer education. Our wholesalers are conducting extensive retirement income training across our distribution channels. Our income series, together with single-premium immediate annuities and our strong presence in fixed-deferred annuities, positions us well in this growing income distribution market.

In long-term care, we also continue to invest heavily in distribution. We've increased wholesale into the independent channel by 25 percent over last year. We believe our 139 wholesalers today gives us the largest wholesaling team in the industry. We are also working to expand the knowledgebase of the nation's long-term care distributors. We have just started to offer a new long-term care certification program to our producers. To date, we've held seminars for over 1,100 producers and expect to conduct seminars for at least another 9,000 producers in 2005 as part of the certification process.

We have a similar sharp focus on growth globally in mortgage insurance. We see continued strong customer penetration in Canada and Australia, Europe is growing rapidly, and we are reaching out to new geographies. We are using a highly segmented approach in our U.S. mortgage insurance business to target lenders who we can serve well with innovative products at attractive returns.

I will just add a quick note on two other key Return On Equity drivers, cost control and investment yield. Despite added stand-alone costs related to going public, we held our expense margin tightly to 16.1 percent of revenues. That's down from 16.3 percent of revenues this time last year without these new costs.

On the investment front, overall portfolio yield held about even with the second quarter and with 5.3 percent. Now, this excludes the impact of bond calls in both periods. We continue to fight the current low interest rate environment to lift our portfolio yields and have new programs targeted for 2005 progressing on schedule.

With a solid earnings foundation built in 2004, we expect to generate operating earnings growth of 10 to 12 percent in 2005. Given the lift in 2004 from bond calls and prepays, right now we would see the 2005 growth coming in at the lower end of that range. Because we're in the process of finalizing our 2005 operating plans, we will provide more clarity around the 2005 growth outlook when we hold our strategic update meeting in December.

Our Return On Equity is also tracking nicely and reflect strong execution. We expect to end 2004 at between 9.8 and 10 percent Pro Forma operating Return On Equity. Now, I remind you that positive foreign exchange is contributing about 30 basis points to that expected result. In 2005, we expect to achieve Return On Equity improvement of 30 to 50 basis points, as we continue to optimize business mix and redeploy capital for higher returns.

Now, let me address for a moment the matter of the investigations by Attorney General Spitzer, which have been widely reported in the press and commented upon in the investment community. Genworth has always taken regulatory and legal compliance seriously and has worked hard in this regard. We have not received any subpoenas to date in this matter and have no reason to believe that our company has been involved in any illegal did-rigging (ph) or tying arrangements. Like most of the life insurance industry, we do have plans that include increased compensation or awards based on sales volume and to the best of our knowledge have disclosed such plans when the regulations require. Now, anytime such situations arise in any industry, I think it's only prudent for management to have an independent group review related practices, and we're doing so. I am not going to speculate on the implications for the life industry or what-if scenarios, as that would be premature, but certainly, various issues will be examined and discussed within the life insurance industry.

So to conclude, Genworth is performing and is well positioned as we wrap up 2004 and head into 2005.

With that, let me turn the call over to our CFO, Rick McKenney, to discuss segment results. Rick?

Thanks, Mike. First, let me start with a roll-forward of the multiple numbers we are tracking. To reiterate, we present Pro Forma data to give a more comparable view of the underlying trends in our ongoing business.

So let me start first with net income on an historical basis. It was 271 million for the third quarter, or 55 cents per share. After reflecting the reinsurance adjustments, Pro Forma net operating earnings from continuing operations were $273 million. Then, excluding $2 million of investment gains, Pro Forma net operating earnings were $271 million or 55 cents per share. We reconciled these views for use so that you can get a good insight into our operating results. As we move into the strategic update meeting in December and into 2005, we will continue to articulate the impact of Pro Forma rules on the business.

From this point forward, I will refer only to Pro Forma net operating results.

So starting with protection, earnings were up 2 percent, which is best explained at the product level. Life earnings were up 17 percent from growth in the business, continued good mortality and lower expenses. Long-term care earnings were up just 2 percent. Net growth in the business of $4 million was offset by 3 million lower net investment income related to the release of $250 million of excess capital in 2003 through the Corporate and Other segment. Normalizing for this capital shift, it would have been about 10 percent growth for the quarter.

So let me expand a bit on the growth of $4 million. The core growth of the business was actually $7 million with two offsetting items. First, our claims experience was a favorable $8 million versus Q3, 2003, but still within the normal range. Second, DAC amortization was higher in the quarter by $11 million versus 2003 due to additional amortization to reflect our year-to-date 2004 policy termination experience and favorable 2003 amortization.

Payment protection continues to do well in our targeted, attractive growth segments across Europe, as earnings declined as a result of a change in tax structure due to the separation from GE and the expected impact of lost earnings from run-off business. This intended run-off will drive the ROE of the business up longer-term. You'll see that impact of the run-off strategy again when we look at sales. Excluding the impact of the taxes and run-off, the underlying payment protection business results were up 12 percent. Finally, group life and health results were down, compared to prior year, which had a favorable claims experience in 2003.

Turning to sales, term life insurance is up on both a sequential and year-over-year basis, reflecting pricing actions that were implemented in June and our continued focus on service capabilities. Universal life sales were down year-over-year, but we're seeing the impact from new products launched in Q2 on sequential sales growth. Long-term care sales have yet to turn the corner but on a sequential basis are stabilizing; they were down just 5 percent. Rate increases in a few states are being implemented currently, so we could see some uneven sales patterns over the next few quarters.

On the long-term care distribution front, we are continuing to expand our career and independent distribution capabilities to regain sales momentum once the market re-establishes itself. For clarity on this slide, we divided payment protection sales into two parts to more clearly demonstrate our progress. Core payment protection was up 18 percent versus the prior year, with good growth in our southern European region and run-off business sales have declined dramatically, as expected. Finally, group life and health sales are up 22 percent, reflecting growth in our nonmedical products.

Turning now to Retirement Income and Investments, earnings more than doubled from the prior-year quarter to $42 million, driven by strong growth in fixed annuities, coupled with widening spreads and an $8 million increase in fee retail. Retail fixed annuity spread widened by about 20 basis points on the quarter and total spread at retail average invested assets were up 1.4 billion. Together, these drove $14 million in higher earnings. Overall, this quarter's performance is above what we would expect the run-rate of Retirement Income and Investments, going forward.

On the sales front, the 126 percent increase in fixed annuity sales was driven by a distribution penetration and a new product design that enables us to balance new money rates and contract floors to meet market tolerances. Traditional VA (ph) sales continued to decline due to our strategic decision not to offer certain guarantee features. However, we continue to innovate in the income distribution space. In addition to our retirement answer, our personal portable retirement plan, we recently introduced a series of similar VA (ph) riders that provide lifetime income after a set waiting period with potential market upside.

Turning now to mortgage, our mortgage insurance results were up nearly 10 percent, once again driven by the strong growth we've seen in international mortgage insurance, where net operating earnings of $50 million were up 19 percent. Underlying results were up 31 percent if you exclude the favorable FX and the impact of lower foreign tax benefits. Unearned premiums, a key driver of future revenues, grew to $1.4 billion in the quarter, compared to $1.2 billion at year-end, 2003.

International mortgage insurance losses continued to be favorable with a loss ratio of 11 percent, up from 8 percent in the prior-year quarter. (technical difficulty) -- we continue to see very strong performance in loss trends internationally.

Turning to the U.S., mortgage insurance earnings of 52 million were up modestly from the past year as -- (technical difficulty) -- underwriting costs and higher investment income more than offset lower revenues from a decline in insurance in-force. (technical difficulty) -- our insurance in-force declined $8 billion to 113 billion. This was due to a small origination market and our actions related to deep cede captive reinsurance agreements.

Our loss performance remained strong with a loss ratio fairly even with the prior-year quarter at 33 percent. The delinquency ratio was also flat at 3.3 percent in both periods.

On the -- (technical difficulty) -- we continue to solidify our global leadership with a total of $19 billion of new insurance written in the quarter.

International new insurance written was level with last year's $13 billion, reflecting the somewhat-slower Australian origination market, offset by deeper account penetration in Canada, Australia in Europe.

New insurance written in the U.S. was down by two-thirds to $6 billion in the third quarter, driven primarily by the two reasons I mentioned earlier, a smaller origination market and actions taken in deep cede captive reinsurance arrangements.

The deep cede restructuring is complete and we're looking forward towards improving sales as we penetrate additional distribution channels. As Mike said, we're using highly a segmented approach in our U.S. mortgage insurance business to target segments of the market with attractive returns.

In the Corporate and Other segment, net operating results improved to a loss of $8 million versus a loss of $24 million in the prior-year quarter. Expenses improved by $29 million versus the prior quarter, when we incurred a class-action litigation settlement of $38 million after-tax. In the 2004 quarter, stand-alone expenses were up about $9 million.

Investment income was also down $14 million after-tax, primarily due to lower assets from dividends paid to our parent in the fourth quarter of 2003 and the funding of the business segment's required capital levels.

So overall, we feel good about a strong quarter across the segments driven by solid fundamentals. In 2005, we are positioned to grow earnings per share in the 10 to 12 percent range and continue our steady Return On Equity progression. We look forward to giving you more details at the strategic update meeting in December.

With that, I will turn the call back to Jean to start the questions and answers.

Thank you. Operator, we're ready to begin the question-and-answer session.

(OPERATOR INSTRUCTIONS). Ed Spehar of Merrill Lynch.

Good morning. I had a couple questions on long-term care and then one overall question. First, on long-term care, given the major changes that we've seen in the market in terms of product and pricing and given where you are now in terms of the rollout of the new products, which quarter do you think it is that, you know, given historical experience of how agents and your wholesalers adjust to changes in product and pricing, which quarter do you think it is before you finally sort of see the distribution force fully productive with new products?

On the financial side, the DAC amortization increase in the quarter -- I was wondering if you could comment on what you would consider to be unusual, or what portion maybe was a catch-up adjustment that we should think about spreading out over the nine-month period? Then I have one follow-up.

Great questions. I'll start with the first one; I will hand it over to Rick McKenney on the DAC question, okay? As I have talked about in the past, first, my view for the potential for the long-term care market remains unchanged. The market is going through an adjustment period, and one that to me makes a more sound market, going forward, so that you have long-term players with well-priced products and strong underwriting disciplines. You know, as we entered this year, we said we would be going through price adjustments; we've basically executed on that front. You've seen the impact in sales as you re-established a baseline. I'm not going to give you a call on a quarter. This is a 2005 timeframe is the way I look at it.

I gave you some details, though, on how we are investing in distribution for a reason -- because even on the last call, I commented that a few things are important in this market, one of which is education. A lot has to be done to educate both consumers and also educate producers about the need and benefits of the product and the opportunity, and we're doing just that.

In addition, I will just repeat what I said last quarter as far as we continue to work on things like simpler product designs and simpler ways to go through an application process that (indiscernible) also supportive of long-term market growth.

Rick, do you want to comment on the DAC question?

To give you a good number that you should probably should spread that to prior period, one of the things I articulated was that we did have favorable DAC amortization from last year as well, so you need to remove that piece of it, which is about $5 million. Then if you look to the termination -- adjustments that I talked about, it would probably be in the 6 to $7 million range, which you need to spread back to a previous quarter's level.

Okay, and then one quick follow-up on overall prepayment income and bond calls -- was it at a more normalized level this quarter on a corporate basis?

I would say it probably was on a normal basis, given the interest rate environment that we are in and going forward, depending on the interest rate environment, you'd see something similar to that, although we have projected, as part of our range, that we would not see the favorability that we've seen in this quarter.

Jason Zucker of Fox-Pitt, Kelton.

Thanks and good morning. I had a couple of things I wanted to touch on. First, Mike, I was hoping you could just follow-up a little bit and perhaps just pinpoint for us where in your business mix you do sell through brokers? Then I was hoping you could give us a little more detail also on the independent group, perhaps is it a legal firm, is it a consultant? Then I did want to follow-up with a question on a business line.

Yes, Jason, good morning. Two observations on that -- first, we use a combination of types of financial institutions and broker distribution really across all of our businesses. Your question really relates more so to Life, because of course mortgage insurance sells directly to banks and you have to (indiscernible) quite separately. So, brokers can be in many types of business.

On your second question, we are using an independent law firm to make sure that we have the expertise. As I said, I think, in any industry, when you have an issue like this or questions are raised, what prudent management does is seek an independent review, so that's what we're doing.

Okay, good enough. Then, let me focus on group insurance for a minute. I was hoping you could tell us what products you saw some of the growth in and whether you thought you were picking up some market share from competitors. I thought maybe it would be helpful too just to very quickly describe your mix of business by segment and how it is sold.

Sure, Jason. I’m going to turn that one over to George Zippel. George?

Jason, good morning. We saw pretty strong growth in the quarter in our group Life and Health business, primarily in our nonmedical lines. The growth was fairly consistent across each of those lines, our disability products, our life products and especially our dental products. We also saw strong growth in our voluntary products as well, double-digit growth, although you know we're not a big player yet in that market place.

Generally, we were flat in our medical products year-over-year. I would say the growth rate in our nonmedical products -- it's hard to know what the market growth rate was but it feels to us like we picked up a little bit of market share in those product lines.

If you could just describe for us again where it is that you spend most of your time -- small case, large case?

Well, where we focus in the market is on the small to mid-sized employers, those who have 500 employees or less. Our sales team and the agents that we use tend to focus on selling multiple coverages, solution sales into that marketplace as that size employer needs to evaluate (indiscernible) services that our team can deliver. You know, we're not an elephant hunter; we don't go after the large corporate accounts. That space is very crowded. We are comfortable focusing on the small to mid-sized employers where we can add a lot of value.

Lastly, can you tell us what percent of your -- how much you contingent commissions are as a percent of your overall commissions and bonuses in this line of business?

If you look at our group benefits business, we pay contingent commissions of about $4 million annually. That would account for approximately 5 to 6 percent of our total commissions for that business unit.

That's terrific. Thank you.

Geoff Dunn of KBW.

A couple of questions on your MI operations -- first, your loss experience showed a sequential decline and we saw one other company in the industry do that this quarter. Could you comment where you think you are in your credit cycle, given the quality of your book and what we're seeing on the economic environment?

Second, could you comment to your ongoing efforts to achieve additional capital dividends out of the domestic MI company?

I'm going to turn that one over to Tom Mann. Tom?

Thanks, Geoff, and good morning. With regards to the loss trend sequentially, I think you'll see that, in the U.S. market, it was actually up. We moved from about $20 million to a $37 million total losses incurred quarter-over-quarter. It was certainly flat year-over-year.

With regards to what are we seeing, we think that our primarily prime-based book is performing almost right on with our expectations, as we have said to you in the past. The primary driver between an increase in our loss ratios this year -- we are at a 33 percent level. At the third quarter, you would probably see us ending the year something close to that. But the primary driver is that we have a relatively young book. About 80 percent of our insurance in-force, as I think you know, is less than three years old, so as we look at our loss performance this year and next year, we will be performing absolutely within expectations as we would understand it now, but you will see a gradual increase in the level of claim payments next year, hard to make a call.

On the delinquency performance, they have been really outstanding so far. I'm not sure really how they will go, but the short answer to your question is we are performing exactly as we would expect to and the loss increases are driven by the relatively young book of business that we had.

Okay, so on the paid front, you wouldn't assume that this is a peak?

No, I wouldn't, but I would suggest to you that, as we look ahead, I don't think we will see the same level of increases in the paids that we've seen this year, but again, when 80 percent of your business is in the three-year or less age, if you will, and as it moves through the loss curves, which we are all experiencing, I think you'll see a marginal increase, a gradual increase in paids next year as well.

Okay, and on the capital front?

I'm sorry. Geoff, could you repeat that question, please?

Sure. There's been an ongoing effort, I believe, to get additional capital dividends out of the domestic MI company, I think specifically with that contingent note to GE. Can you give us an update on where negotiations are with the DOIs (ph) to achieve that kind of dividend?

We continue to discuss that on a similar path. As we've said with the contingent notes, we do expect to actually receive the approvals in those funds one year after the IPO, which would be in the May time frame. We continue to work towards that timeline although we would hope to pay that note off as soon as possible.

Okay, thank you.

Colin Devine of Smith Barney.

Good morning. Mike, you reiterated guidance this morning for the 10 to 12 percent, which I guess suggested a 230, 240 number for next year. I was wondering, under what sort of interest rate scenario you are assuming, what's your key driver? Because it certainly was my understanding that a significant part of the earnings growth was going to come from getting the portfolio yield up. That's the first question.

The second question, you mentioned that Genworth has not received any subpoenas from the New York Attorney General. I was wondering if you could just expand on that to include the (indiscernible) or SEC with respect to bearable-annuity business, both for yourself or your parent.

Well, two observations. First, why don't I start there and then will go back into the interest rate scenarios, okay?

First, regarding the current issues that we all read about, we've received no subpoenas of any type from -- because as I've heard reports, as you've read reports, those potentially are coming from more than one source in today's environment. Again on that front, I have no reason to believe, nor no evidence of there being -- of there ever being any illegal type of activity -- no bid-rigging, note tie-in, those types of illegal activities.

If you go back several months into last year, when there was a broad-based inquiries (sic) about the whole mutual fund area, the VA (ph) area, we, like all other major carriers, received those inquiries and were able to provide a negative response.

Okay, so specifically on the variable-annuity sales practice issue, which remains alive in the eyes of the regulators, you received subpoenas a year ago and there's been no subsequent ones since? Is that what I hear you saying?

Right. We provided a negative response at that time and there's been absolutely no follow-up.

That refers to both Genworth and the parent?

I can't comment upon the parent but I'm talking about all of the entities that involve Genworth.

I'm just asking because technically the VA (ph) liabilities still fit with the parent. I just want to make sure we're not arguing semantics here.

I'm not playing semantics with you. I just have to comment as Genworth but I understand your point and I think you understand mine.

Now, Rick, do you want to -- (multiple speakers) -- the interest rate environment?

Sure. Just to answer your question in terms of where we are sitting with the 10 year right around 4 percent, breaking it into the two parts, if you look at on the Life businesses, as I think we've told you, we were looking more towards an up interest rate scenario and then where interest rates have come down a little bit, we would project that, given our certain levels, we may see below a penny of pressure from that, so it's not the pressure on the Life side. The mortgage side is going to be based on how the book performs, what our persistency looks like, so the secondary results of that are what we are seeing today on the persistency front and what we expect to see, going forward. So we still feel comfortable within our 10 to 12 percent range.

Okay, so then in terms of the portfolio yield coming up, you're saying it's only going to (indiscernible) a penny?

Yes, and that's not just the yield. The yield will be harder to increase quickly but that's taking into account our crediting rates and just the overall spreads.

Vanessa Wilson of Deutsche Bank.

Thank you, good morning. Could you talk a little bit about your bullet point on redeploying capital and give us a sense, beyond the capital you've identified, what are the other opportunities to unlock capital? You did have a question on your mortgage insurance business. My sense was there's further opportunity there than what you've articulated. Then could you take the capital discussion and give us a sense of how we should think about it in terms of a share repurchase or acquisition opportunity?

Good morning, Vanessa. Let me just walk through a few levers on capital redeployment. First, you have areas, like I commented upon specifically this morning, where you have individual blocks of business that you try to run-off as fast as possible. You know, GIC is an example; we have low returns in some older blocks of business. They are relatively short-line, so they run-off basically over the next four years. You've seen the progress running those off. Then we've also redeployed where we had some distribution relationships, and payment protection again being the example, where we didn't like the returns; they were old contracts, and we basically exited those. So that's one lever and we will continue with that lever.

The mortgage contingency opportunity is built-in because of the note. So that's already built into the capital structure you've seen. So that is not an additional upside opportunity, and I think there's good visibility around that.

We are focused, in many of our lines though, in capital-efficient product designs. You saw that in the example of XXX; we used that in the annuities line. We focused on that as far as future generations of mortgage insurance products, so capital-efficient product designs I see as an opportunity, specifically as far as being able -- for you to take excess capital and get it to work in the best fashion, going forward.

Last call, we talked about looking at things that have been done in the industry like closed-block securitizations, things like that. Those are difficult; those are complex. Many times, those are not things I see on the near-term horizon as I look at the situation right now. We are in a good capital position, though. If you look at our capital, you basically have roughly between excess capital at the holding company and our stat earnings power; you have roughly a billion there, plus your debt capacity. One of the ways we can use our excess capital is first priority is core growth, core growth and attractive returns. The second priority behind that is M&A and looking for blocks of business, as I've commented upon in the past, that can have attractive returns. We're good at buying blocks of business. We can take cost out, and we have good ways to evaluate the risks around any block of business to make sure you're not buying liabilities.

The third lever behind that -- or priority -- would be evaluating share repurchase opportunities as well as gradual actions over time on the dividend yield front. I would just reiterate that while GE is in a process of selling down shares, until GE is getting below, say, 50 percent, I think the ability to use the share repurchase lever is really precluded. We are studying the examples that have been used in the market where people have looked at using a share repurchase plan at the same time they do a secondary, so the work continues on evaluating that as an opportunity. So hopefully that gives you an idea of the various levers we are using. I like the visibility we have of each and the rigor we bring to pursue those as aggressively as possible.

Mike, that's very helpful. Just one follow-up -- as we think about share repurchase, should we think about something on the magnitude of 200 million, 500 million? How should we -- you've got this billion of equity -- 500 million of equity available now and an additional 500 million of set (ph) earnings. What magnitude of numbers and how long will you sit on excess capital waiting for an acquisition before you would do share repurchase? I understand the point about getting GE below 50 percent, but how do we gauge timing and magnitude?

I'm probably going to disappoint you on the specificity on this one, Vanessa. I will give you two thoughts. One is we're going to show you some of the opportunities, when we have an investor day, about how we can redeploy and the opportunity that that has in the business. Put it this way -- we would consider a level of capital that doesn't preclude our other strategies of core growth and having some capital available for M&A when we would look at a share repurchase lever. So, we would look at it on a multi-front context.

As far as timing, I think we have good visibility on redeploying our capital right now, so I'm not going to lay out a specific timing. As I said, doing some work around -- is there an opportunity to consider that lever? Whenever GE decides to look at a secondary is where we would focus our effort right now.

Our next question comes from Tom Gallagher of Credit Suisse First Boston.

A couple of questions -- first, on international MI, can you just talk about I guess a couple of your different markets? First would be how is the overall origination market been trending in Canada? How much longer do you think you can keep taking share from the government there? Then just a broader question on international MI -- based on what's happening in Australia right now, do you still think it's reasonable to expect double-digit production growth in '05?

Thanks, Tom. Tom Mann, do you want to take that one? Go ahead.

Let me start with Canada. I think you've got three questions there. The origination markets in Canada, primarily because we've had pretty consistent mortgage rates, have been pretty consistent and we think they will continue to do so. There's obviously a little bit of lift every year as you have your normal growth in mortgage debt.

I'm not going to get into share positions versus the Canadian government. As you know, since we've entered that market, we have been reasonably successful with probably a couple or three percentage points of share penetration a year. We still remain reasonably or quite confident in our products, our technology, our sales force and what we're doing in that market. So, I think we will continue to do pretty well in Canada as well.

In Australia, I think your question there was, given the cycles that we're seeing in mortgage originations, we will continue to seek double-digit production growth? Did I get that right, Tom?

Well, based on Australia and what's happening, do you think, for the overall international MI business, you can see double-digit production growth?

Yes. The comment that I -- we had the teach-in that Mike referenced a couple of weeks ago, the comment I tried to make everyone aware of when it comes to judging production growth for the mortgage insurance industry and the basis of new insurance written is that, in any of the markets that we operate in driven by several factors and primarily mortgage rates, you can have reasonable if not material changes in the market size and the related NIW levels. So, that's what we've seen in Australia, to answer your question directly there. We had a very robust housing finance market in third and fourth quarter of last year that actually spilled over into this year as well. So, it obviously gave us very positive Vs (ph), if you will, from an NIW perspective.

But the thing that I would ask you to think about though, Tom, is we really, from an international perspective, while we certainly track NIW, it is a measure of how well we are doing in the market at any one given time. We really pay more attention to the insurance in-force and the unearned premium reserves. So even though our Australia market or the Australian housing market I think for very, very good reasons was down third quarter of this year compared to third quarter of last year, our insurance in-force from second quarter to third quarter was up nicely from an international perspective, over $14 billion. Our unearned premium reserves grew by over 100 million. So what we're really looking for internationally is just consistent penetration into those markets. Given what the market will give us, if you will, and usually over the long run, you're going to see, based on history, about 6 to 8 percent growth over the long run in those markets and we try to ride that plus execute continued account penetration.

So, Tom, is it fair to say that you don't want to get pinned down to any production targets for '05, but from an in-force standpoint, you're very comfortable with double-digit growth?

That's very fair to say, Tom.

Just another question on the universal Life business -- and I know sales have been down a little bit there, but can you talk about where you are, from a potential securitization solution standpoint, like you've done on term and whether you think this would have a meaningful impact on your overall Life sales?

George, do you want to comment on that?

This is George Zippel. As you know, we executed the industry first and I believe still the industry only securitization for the XXX reserves for term Life insurance. We are working on a second transaction in that regard. In addition, we are working on looking at doing a similar type of transaction for the A-XXX reserves that are attracted by universal Life products.

As you can appreciate, however, the complexity of the UL product is a lot higher than the term product, so as much as we believe we are financially sophisticated, we are working through the various challenges of the complexity of the product. At this point in time, I'm not going to make a comment as to whether it's going to work or it's not going to work, but I can say we are working on it very, very actively and we've got some of the best brains in our company and outside of our company helping us.

I guess just a related question -- when we started out, the Genworth Company, I guess the way I viewed it is more of a term company. Would the view here be, if you get something in place that you'd like to dramatically growing in the UL market -- or is this more to get yourselves more aligned competitively with others?

Tom, this is Mike. First, remember that the relationships we have -- you know, we have sound distribution relationships and many of our distribution relationships sell a variety of products; they sell term; they sell universal life; they sell long-term care; and many sell also fixed annuities as well. So, one view we take is this is penetrating existing customers and broadening out with them. In addition, we are able to certainly leverage our capabilities. If you look at our underwriting capabilities, our low-cost operating structure, that – (technical difficulty) -- competitive aspects to the universal life business.

Then there's new distributors. There are some distributors that have more bias towards universal life than, say, for example, term, and we are approaching (indiscernible) to broaden out our distribution and add them.

So we win very much with many of our distributors by having a multiproduct relationship and we see this as an opportunity to add one more growth driver to the Life lineup.

Okay, thanks.

(OPERATOR INSTRUCTIONS). Paul Miller of FBR.

Going back to the Australian markets, since that's where a big chunk of this growth is coming from, we know that the Australia market has a huge rental population. I was wondering if you would break out or you can talk about -- because we know that there is some homes -- or we've heard that there might be some home price, at least the slowdown in depreciation or -- and some of that is in the rental markets where there might even be some depreciation. Are you in the rental markets of the MI business? Can you add some color in the credit position of Australia?

This is Tom Mann. I will be glad to do so. Again, let me give you a quick reminder. When you do look at our international growth, it's pretty well balanced between Canada and Australia, and Europe is growing just as a sideline. Our performance during the third quarter in Australia continued to be very, very good.

Regarding the outlook for the economy, as we've discussed in past conference calls, we do believe that the Reserve Bank of Australia has done an excellent job of managing the housing appreciation that has occurred in that market, whether it be in the investor properties that you may be referring to or the single-family detached. As you know, there have been rate increases, I believe, about 70 basis points as a possibility of a further rate increase this year.

Housing appreciation across the board in Australia, as you asked, we do believe there are several sources for this, but it has slowed to about a 1 to 2 percent level during the first half of the year. There are a variety of estimates as to what may occur. During the rest of the year, they continue at that level and that would probably put it at a 3 to 5 percent level for the total year but again, it could be less or on top of that.

The thing that I'd like to point you to as well in the Australian environment is that the economy there remains very, very healthy. If you read the Reserve Bank of Australia report that was issued at the end of the second quarter, it would probably suggest to you that the Australian economic situation is probably as good as it it's ever been and it has been holding quite strongly for a while.

Again, as a reminder about our portfolio, it is a prime credit quality portfolio, as most of our international book is. The average loan-to-value that we have in our portfolio in Australia is 77 percent. Now, one of the things you need to keep in mind in Australia is that we do a reasonably large level of business with mortgage managers or mortgage bankers is how we would refer to them in the United States. Going in, their loan-to-values are less than 80 percent to begin with. The effective loan-to-value that we have in that market, where we try to estimate our original loan-to-values based on the appreciation that we received, is probably the 60 percent or below. Average loan size, again compared other markets, is comparatively low at about $108,000.

You mentioned investor properties specifically. We do have about 20 percent of our portfolio there. We've seen the same rental declines that you have mentioned, but the investor properties that we have there continue to perform quite well. We have limited our loan-to-value concentrations of those and what I mean by that is, when we go into those properties, even though they are a cornerstone of the Australian housing market, that in certain areas for instance we will limit our going-in loan-to-value to 80 percent and we underwrite them to an average of about a 90 percent loan-to-value.

The thing you need to remember about investor properties in Australia is that it's a cornerstone product by the Australian government to support housing. Historically, when we've looked at the performance of it, it has been very consistent with single-family detached.

Thank you very much. That was a very complete answer!

Well, they pay me well! (LAUGHTER).

Mark Finkelstein of Cochran Caronia.

A couple of questions -- first, on long-term care, I just wanted to go back to some comments that were made as opening remarks. What are the last few states that you are trying to get your prices increased or changed, I should say? How material are those? What product are you currently selling in those markets?

This is Mike. Well, we are working through Indiana, Maryland, Massachusetts, Pennsylvania and New York. Hence, you can't predict sales by individual state. That's why I said you may see some unevenness in trends as those go ahead and roll out.

The nice thing when you look at long-term care and you look into the business is there are multiple levers. Certainly, new sales is an important lever, but in addition, when you look at our investment performance, our loss performance, our cost performance, there are other levers that aid the performance of that business overall.

Okay. Just thinking about the 39 million of sales levels, do you have a rough idea of how much of those are coming from the states that you are affecting price changes in?

No, I don't have that and honestly, for competitive purposes, I'm not going to break those out.

Fair enough. The second question is on the VA (ph) side; I just wanted to clarify. In the second quarter, you talked about launching a withdrawal benefit, which would be fully hedged, and you're expecting to claw (ph) back sales in that product. It sounds like a slightly different tone and a little bit more reserved towards guarantee features. I just wanted to clarify what the approach in the market is.

I'm going to turn that over to Pam Schutz. Pam?

Hi, this is Pam Schutz. Let me talk about our variable annuity strategy, and we look at it in two buckets, really traditional variable annuity and our income series. We do not see ourselves as a me-too player or like everybody else in the variable-annuity space. We do offer traditional variable-annuity products, as we've talked about. We launched the guaranteed withdrawal product last quarter. We will continue to compete in that market for breadth and for mix and leveraging our distribution. However, as we've said before, we have not offered the riskier guarantees like AV and IV, and that has been our position from a risk-management view.

In terms of the guaranteed withdrawal benefit, we do require asset allocation, as well as we have hedging in place.

Now, let me talk about what we are doing in variable annuities. We are focused on the income space, retirement income -- very different, and we are looking at retirement income for life. This year, we have built out our income series and added products built off our GE retirement answer, which we introduced in 2002, which is a personal pension plan-type annuity. Then in addition to that, we have offered two new riders -- one, a rider on our VA (ph) chassis that looks like the GE retirement answer, and another one called the Principal Protection Advantage, which is a lifetime income product. It is a deferred payout annuity, variable annuity in which there is a floor guarantee payment, and equity upside in retirement and annuitization.

So -- and we will continue to leverage our leadership position in income annuities. As you know, we are leaders in fixed-income annuities, so that's how we are playing in the variable-annuity market.

Okay, that's very helpful. Just one quick question I think for Rick. On the European payment protection side, sales were up 18 percent in the quarter. Do you happen to know what that number would be, excluding foreign exchange?

I'm sorry. You cracked up the question. Could you repeat that please?

(inaudible) 18 percent (inaudible) European, what is it without FX?

I think it was actually a very small impact on the sales.

Okay, so it had less of an impact this quarter than last quarter?

Yes.

Joan Zief of Goldman Sachs.

Thank you, good morning. I have just a few questions. The first question I wanted to ask has to do with your target of your rising ROE. You know, we're talking about your ROE this year being helped by the foreign exchange and being helped by the prepayments and those types of things in the investment area. So, to get your next 30 to 50 basis points of ROE in 2005, doesn't that really imply that the ROE is actually improving even more than that 30 to 50 basis points? Because you may have the benefit of some non-recurring items, potentially, this year. That's my first question.

My second question is about sales. One of your strategies is to grow the businesses that have the highest returns. I was wondering if you, as you are looking at the sales growth and the sales momentum of those products, are you disappointed at how slowly the recovery has been, or have you expected all along that the sales recovery would take this long?

My third and final question is, with all of this stuff going on from the Attorney General area and this delving into contingency commissions and maybe the added expense of disclosure and things like that, do you think that you're going to see more opportunity for consolidation in the industry next year?

This is Mike. Let me just take them one by one. First of all, when we articulate ROE goals, we do so on an operating basis, not as forecasters of foreign exchange, so I will let you predict foreign exchange; we are focused on executing on 30 to 50 basis points off of where we end up.

Second, on sales, your characterization was a broad one and frankly, I don't think that is a fair one. If I walk through it, let's look at it by segment. In fact what you see is us executing a strategy and a strategy that also reflects a disciplined allocation of capital, putting it where you get the best returns and disciplined Risk Management.

So let's go by segment. You look at protection -- nice progress in term life, sequential progress in universal life, where admittedly in universal life we're coming off a very small base, but we talked about that being a future business; excellent progress in payment protection; excellent progress in the group business.

Then we have all talked about long-term care. In long-term care, you see us being a disciplined player. We said we are going to -- we were going to be a leader in shifting price in that market; we weren't going to shift our underwriting standards; and that's how we're going to play and that's exactly what we're doing.

I think Pam outlined very well nice progress in our income distribution strategy. We are not trying to be a me-too VA player, nor are we trying to offer, even with the new WB, types of features where we don't think you can (indiscernible) your risk. That's why, when we put out a WB, we put it out with asset allocation and as well as four types of hedging. That's what we think is prudent. So, we are executing that strategy. We tried to start splitting out and giving you a little more granularity so you can see the product sales so you can see how we are executing that strategy as opposed to have it all combined in something that's a little more morphus.

Tom hit on the international growth of insurance in-force on both a quarter-to-quarter as well as a year-to-year basis. Excellent progress and as you know from our meetings, the teach-ins, things like that, when you watch that unearned premium balance now up to 1.4 billion go on your balance sheet, you have a nice, stable earnings opportunity as that amortizes over future years.

In the U.S., it is rebuilding a position as far as the U.S. MI business. We have to penetrate additional distribution. We did complete the renegotiation of the various super deep-cede relationships and will build off that basis. While we pursue our new products, given the entire industry has let about 40 percent of the market shift towards simultaneous second mortgages. That is not an overnight transition in the U.S.; it is a disciplined one and we have line of sight. So I think you have to look at that when you look at the sales end of it.

As I said, on the third point, I'm not going to speculate on what-if scenarios about what does this means to the industry or not. I think, more generally, when I look out five years in the life insurance industry, all of the investigation work aside, there's always the opportunity for consolidation, for efficiency, and for companies to build greater reach. We will see that ebb and flow. I wish I could predict that as well, but I can't.

All right. Thanks a lot.

Steven Schwartz of Raymond James.

Good morning, everybody. I just wanted to find out and follow-up on a couple of things. Ed Spehar originally asked about DAC. I'm a little unclear. How much were you suggesting that DAC amortization added to earnings in the quarter?

Actually, the DAC amortization didn't add to earnings in the quarter. Actually, it bought earnings down, which was offset by good loss ratios. I did say that number was 6 to $7 million of true-ups in the quarter that really could be spread over the course of the year as we refined our termination calculations.

Okay, very good. Then I was wondering if, Rich, you can touch upon the tax rate in corporate. It was very high but obviously on a pre-tax loss. Was there something going on there?

We look at our tax rate really on an overall basis. It came in around 33 percent, slightly over and it was pretty clean on that. Now, for the accounting rules, we do have to make an APB 28 -- APB 23 (ph) adjustment -- 28 relative to that, so that actually will come through in the corporate segment.

Okay. Then, one more thing I wanted to really follow-up on was the term life. Maybe you can explain to us, without giving away any secrets, term life and how you cut prices in a sense but then expect returns to stay higher or even go higher it sounds like than what you were getting prior.

This is Mike. There are two aspects to that, again. First of all, we focused on a capital-efficient product design and using, as George talked about, a securitizable approach to handle redundant reserves. It took a long time to figure out and we were the first to execute and we continue using that.

The second aspect is we basically brought our pricing back in line to where before we had figured out the XXX solution, we had taken prices up 2 (ph). We brought those back in two price movements, one late last year, one in the June timeframe, but importantly, we've coupled this with a lot of focus on service and support, so it's a combination of those actions and service and support actions that I think have given us a favorable response from distribution.

Okay, so Mike, what you're saying here is that the price cut basically reflects the success of the securitization?

I'm just saying that the price cut, when you have a capital-efficient product design, lets you take a product to the market that also is giving investors a responsible ROE.

All right. Thank you very much.

I would now like to turn the call back to Ms. Jean Peters.

Thank you very much. We thank you all for joining today's call. For any remaining questions, both Alicia Charity, our VP of IR, and myself will be available the rest of the day and in the coming weeks to answer your questions. We look forward to seeing you at the December Strategic Update meeting on December 15 here in Richmond. Thank you.