Genworth Financial Inc (GNW) 2004 Q4 法說會逐字稿

Good morning, ladies and gentlemen. And welcome to the Genworth Financial's fourth quarter earnings conference call. My name is Bill, and I will be your conference coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of this call. 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. Ms. Peters, you may proceed.

Thank you, Bill, and welcome everyone to Genworth's fourth quarter 2004 earnings conference call. Our press release and financial supplement were both released last evening. Both are posted on our website, as are the slides we'll be using this morning. Our CEO, Mike Fraizer, will discuss highlights of operations; and CFO Rick McKenney will take you through segment 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.

In a regard to forward-looking statements and the use of non-GAAP financial information, as always elements of our comments today are forward-looking, and are based on management's best view of our environment and businesses as we see them today. Prior to joining this call, you are asked to read and acknowledge that these elements can change as the environment changes, and we ask that you interpret all of our comments today in that light. Today's presentation also includes non-GAAP financial measures that we believe may -- may be meaningful to investors. Non-GAAP measures have been reconciled to GAAP where required in accordance to SEC rules. With that, I would like to now turn the call over to Mike Fraizer.

Thanks, Jean. Good morning, everyone, and thank you for joining us on today's call. Genworth Financial achieved a number of important milestones in 2004, and clearly delivered on goals outlined to investors during our IPO. Pro forma net operating earnings for 2004 of $2.13 per share were up 20 percent over the prior year. We improved our operating return on equity to 9.8 percent at year end. Shareholders' equity grew nicely as well, with book value per share at December 31st reaching $22.99, excluding other comprehensive income, and $26.28 on a total GAAP basis. In December, we dividended over $700 million of excess capital out of our mortgage insurance company, successfully releasing contingency reserves. Now of this, 550 million was paid to our majority shareholder, G.E., redeeming a contingent note we had in place at time of the IPO, so this had no impact on equity. We expect to see our risk-based capital ratio strengthening to the 350 percent range, and we still see well over a billion dollars of excess capital and debt capacity that we can work to redeploy in 2005.

In the fourth quarter, we held our first investor day and discussed our plans and outlook for 2005 in detail. We also had a bit of fun during the quarter, with our ongoing brand launch, as Genworth sponsored 2 charity events for Alzheimer's and Reading Fundamentals in the final 2 episodes of last season's TV show, "The Apprentice." That got our name out in front of some 22 million or so viewers, while we continued a multifaceted brand rollout. Genworth's brand launch focused primarily on reaching distributors in 2004, and I'm pleased to say that our first 6 months as a stand-alone company we made excellent progress. In our targeted producer audience, awareness of Genworth as distinct from our predecessor company was well over 40 percent, and distributors recognized Genworth in a positive sense as a different kind of company to do business with.

The fourth quarter marked good fundamental progress on several fronts. Pro forma net operating earnings were 52 cents per share. This included a one time charge of 32 million on a small run off block of equity indexed annuities resulting from an adjustment of reserving processes. Now let me be clear. I am not happy about this charge. We made a mistake in this specific product reserving area and had to update formulas, change our process, and tighten functional alignment. We take controllership seriously across all areas of our business, move decisively to deal with this issue, and are moving forward.

Now turning to segment results, each operating unit had solid earnings growth in the quarter, with increases in 8 out of 9 product lines. Mortgage Insurance was particularly strong, with continued International growth and ongoing favorable loss experience. In fact, International Mortgage Insurance's earnings surpassed the U.S. side for the first time in that segment, demonstrating the success of our global business strategy. We continued to manage our sales mix rigorously for sound capital deployment and ROE growth, and at the same time, we managed costs well, self-funding our new public company costs during 2004, while achieving additional productivity. Rick will take you through each segment's earnings in detail shortly.

Let me just take a few moments to talk about some of the operational progress we made in the quarter, and how we're positioned to grow in 2005. Starting With Protection, We Had Sequential Quarterly Sales Growth In Term Life, Universal Life, Long-Term Care, and our Group Business. On the Life side, we added one major marketing organization, 17 brokerage general agencies, and a number of producer firms to our selling group in the quarter. We also completed our second funded trust for 300 million to support Triple X reserves on our Term Life business, giving us additional capital efficiency. In Universal Life, we continued our build-out focus and have several product additions to launch over the next few quarters. In Long-Term Care, we intensified our producer education strategy, training 1,000 agents in the fourth quarter. We also implemented our first online Long-Term Care application and E signature capabilities, which will improve speed and ease of doing new business. And we are developing simplified and more affordable Long-Term Care products for later in 2005. These actions are the bedrock of our growth strategy for Long-Term Care, but as I said on last quarter's conference call, the industry continues to be in transition, and it is still early to say when our sales growth will turn.

Moving to Retirement Income and Investment, sales of our income distribution series products nearly doubled over the prior year to 84 million, and we were up 20 percent sequentially, largely due to a combination of new income products and a great deal of hard work to expand producer education and support. Our industry-leading wholesaler force continues to educate distributors about the need for income products across distribution channels. Fixed annuity sales were down both sequentially and versus the prior year, reflecting sound pricing and ROE disciplines in current interest rate environment. Total fixed annuity assets were up 6 percent over the prior year, and we expect a benefit from spread widening in 2005 as some low return blocks run off.

In the global arena, for Mortgage Insurance we continued to penetrate key customer relationships in Canada, Australia, and Europe. In fourth quarter, International new insurance written was up nearly $3 billion, to 15.2 billion. This penetration improvement is offsetting the impact of slowing origination markets in Australia, and to a lesser extent, Canada. Collectively, the growth we achieved in 2004 has built up our unearned premium reserve to 1.5 billion at year end 2004, compared with 1.2 billion a year-ago. That's just tremendous progress in building an ongoing stream of future earnings. In U.S. Mortgage Insurance, we continued to pursue a highly segmented approach to lenders in order to penetrate higher return flow business to both product and service innovation, while working to recapture a portion of the simultaneous second mortgage market. We expect these and other initiatives to reverse the downward trend of new insurance written we saw in 2004, and help us regain share.

Now let's shift to our 2005 outlook. At our investor day, Genworth's management team laid out plans and demonstrated the momentum we had built to carry this company forward into 2005. With 2004 results behind us, we remain confident in that outlook, and in our ability to deliver net operating earnings in the $2.30 to $2.40 range for 2005. We're continuing to add new business at attractive returns and to exit or run off those that don't meet our execution hurdles. We're building capital, and we expect to be able to redeploy it more actively in 2005 to a combination of core growth, acquisitions, and the potential for share repurchase. We are focused on expense control and on implementing investment programs to gradually improve yields, recognizing 2005 is a challenging investment environment. Taken together, we expect these growth in capital management initiatives to lift our operating ROE another 30 to 50 basis points in 2005. Looking ahead, we recognize that our shareholder base may be expanding sometime in the coming year, as our majority holder, G.E., considers a move to reduce its holdings over time. We believe we have delivered on our commitments to shareowners who bought Genworth at or since the IPO. So it is our clear goal to take that success and momentum and build further value for our shareholders as we move forward. With that, I'd like to turn the call over to Rick for details on the quarter. Rick?

Thanks, Mike. Good morning, everyone. Let me start with a walk between net earnings and pro forma net operating earnings. Genworth delivered $346 million, or $0.70 per share of net earnings from continuing operations in the fourth quarter. The first item to adjust for was a $68 million tax benefit in the current quarter, or $0.14 per share. This benefit related to the year-end calculation of certain tax elections made in connection with the IPO. The second item relates to a majority -- our majority shareholders' 60 percent sale of a global outsourcing business. We realized a gain of $25 million, or $0.05 per share related to a waiver of certain rights we had under a servicing agreement with that business. And lastly, we had net realized invest losses of $1 million in the period, bringing our pro forma net operating earnings in at $254 million, or $0.52 per share, for the fourth quarter, and $2.13 per share for the full year 2004. From this point forward, I will only refer to pro forma net operating results.

Before I get into the details by segment, let me take a moment to note that last year's fourth quarter in particular was impacted by the IPO and separation processes for our majority shareholder, GE. As I talk about each segment, I will clarify these items and give you a sense of the underlying operating performances of the businesses. With that, let's start with the results of the Protection segment. Protection segment earnings are up 46 percent and are best explained at the [technical difficulties] level. Life earnings were up 34 percent from 2 key drivers. First, the business had net growth from in force performance, new sales, and lower expenses of $7 million. Included in this number was less favorable mortality of 4 million, compared to the prior year quarter. Though up slightly for the quarter, mortality is running well within our band of expectations on a full year basis. And secondly, $10 million was related to a reserve strengthening in 2003, within a run off block of whole life. Fundamentals in the life business are solid and consistent as we head into 2005.

Long-term care earnings were down slightly to 46 million. Underlying operations are up 2 million, or 5 percent, due to new sales [technical difficulties] in force performance. We also had 2 adjustments. ast year we had a $10 million benefit from a policy valuation system conversion, and in the current period, we adjusted our max calculation process, driving a $7 million positive impact. Neither of these are expected to recur.

Overall, we feel good about the performance of our Long-Term Care business. Loss ratios and termination rates are stable, and we continue to realize investment yields that are in line with new business pricing. Clearly, our focus on investment strategies is key to driving continued performance in this product line. [Technical difficulties] protection results were solid in our targeted attractive growth segments across Europe. Earnings were $22 million, compared with a loss of $5 million in the fourth quarter of 2003. Strong core operating growth of 4 million, or 22 percent, was driven by improved business mix, as we replaced lower run off -- lower return run off business with higher margin business in both the U.K. and in Europe. We also realized $2 million of income growth due to foreign exchange.

And additionally, there were 3 one-time costs incurred in 2003. First, in conjunction with the IPO, preparations and separation from GE, we had a $10 million cost associated with employee compensation and benefits. Secondly in 2003, we strengthened claim reserves in the travel [technical difficulties] portfolio by $6 million. And lastly, we incurred $5 million of higher DAC amortization, primarily in our run off block of business. Looking ahead to 2005, the business is in great shape to drive continued growth across its markets.

Finally, in Group Life and Health results were up $1 million compared with the prior year, due to in force performance, new sales, and improving persistency. Thumbing out the Protection segment for 2004, core growth is emerging as expected, margins are operating within normal bands, and rigorous expense management remains the focus.

Turning to sales, Term Life Insurance is up on both a year-over-year and sequential basis, reflecting our focus on competitive pricing and differentiated customer service. In fact, today we announced another selective price move. We did so based on the effectiveness of our capital markets and reinsurance solutions, our ongoing evaluation of the competitive market place, and as always, maintaining our pricing processes. Universal Life sales [technical difficulties] percent sequentially, as we continue to see a positive response to new product offerings. Long-Term Care sales have yet to turn the corner on a year-over-year basis, but sequentially we have seen 4 quarters of stable sales, and we were up 5 percent in the fourth quarter. As I mentioned last quarter, we have just finished launching our new product in a few large states, and we could continue to see some uneven sales patterns over the next few quarters. A primary focus remains on our Long-Term Care distribution. We continue to expand career and independent capabilities, reaching a level of 140 wholesalers in 2004, up 25 percent -- the largest wholesaling force in the industry. Our efforts here and with the producer education Mike spoke of are key in positioning Genworth to regain sales momentum as the market reestablishes itself.

Core Payment Protection was up 16 percent, compared with the prior year, from growth across all its markets. Sequentially we saw some seasonality and some timing impacts related to client contract renewals that occurred earlier in the year. As expected, run off sales have declined dramatically. And finally, Group Life and Health sales were up 16 percent over the comparable quarter last year. Nonmedical products continue to show steady progress, up 6 percent for the quarter and 22 percent on a full year basis. And medical product sales were up 42 percent compared to fourth quarter 2003, a solid response to our renewal pricing strategy and focus on improving persistency.

Turning to the Retirement Income -- Retirement Income and Investment segment, earnings increased to $35 million, compared to $12 million in the prior year quarter, driven by strong growth across all product lines. Beginning with spread retail, earnings were $9 million compared to 8 million last year. These results include the $32 million charge on the equity indexed annuity block. Let me stop there for a moment and echo Mike's remarks. We are disappointed with this charge and we do not take it lightly. While looking at the underlying operating performance of this segment, we saw solid growth of $15 million driven by increased assets under management, up 9 percent year-over-year and improving spreads in all products. We also experienced lower bond calls of $2 million and favorable guaranteed fund assessments of $5 million in the current quarter. In the prior year, we had $15 million of accelerated DAC amortization, reflecting spread experience and expectations.

As we talked about during investor day, the operating drivers of this business line continue to improve. Assets are increasing and spreads continue to widen. Those strong fundamentals, coupled with our expanding distribution, set the stage for solid performance in 2005. [Technical difficulties] retail is also up significantly to $16 million from break-even last year. Contributing to the strong results are 3 key drivers. First, the [technical difficulties] delivered core growth of $4 million, due to a 43 percent increase in assets under management across the products -- Traditional variable annuities, our income series, and asset management. Second, expenses compared to prior year are lower. This favorability was partially dampened by higher DAC amortization in our variable life block. Finally, we had higher fee income for managing blocks of business for our majority shareholder. The focus on expanding our distribution reach through targeted acquisitions to complement our core sales is working well.

Turning to spread institutional, operating earnings were up $10 million, and increase of 6 million compared to fourth quarter of 2003. Driving this change was $2 million of operating growth and $4 million of bond calls and investment favorability. We have made substantial progress in shifting the mix of assets under management in 2004. About 700 million of lower return, fixed GIC assets ran off the books and were replaced with higher margin business. We ended the year with assets about flat and spreads repositioned to support earnings growth in 2005.

On the sales front, our portfolio of retail spread products are down compared to prior year and to prior quarter, primarily driven by fixed annuities. During the quarter, we maintained our rigor in pricing, despite competitive pressures, as several companies in the market moved to higher rates. We continue to make great progress in the income distribution space. In addition to the retirement answer, our personal portable retirement plan, sales of recently introduced series of similar variable annuity riders that provide lifetime income with potential market upside are doing quite well. Up 87 percent compared to last year, and 20 percent sequentially. Traditional variable annuities sales are down, due to our limitation of fixed account utilization and our decision not to offer certain [technical difficulties].

Moving on to the mortgage segment, mortgage insurance earnings were up nearly [technical difficulties]. First, on the international front, earnings were 57 million, up 50 percent from the prior year. As Mike mentioned, this was the first time international earnings were higher than in the U.S.. We had $8 million, or 18 percent, operating growth from higher insurance in force, with continued favorable loss performance. And $4 million of favorable foreign exchange with the weaker U.S. dollar. Also in the the fourth quarter of 2003, we incurred $4 million of higher taxes and $3 million of higher cost associated with the exit of a reinsurance agreement. International mortgage insurance losses remain low, with a loss ratio of just 14 percent. We continue to see strong performance from our in force book.

Turning to the U.S., Mortgage Insurance earnings were $50 million, compared to $39 million in the prior year. 2003 included $9 million of higher tax expense, associated with IPO preparation. In 2004, a higher percentage of income came from municipal bonds, driving down our tax rate and creating a modest lift in operating income. Primary insurance in force was down 13 billion, to 109 billion. This decline was driven by policy lapses from refinancing and lower new insurance written as a result of a small origination market, as well as lower share from our actions related to deep cede captive arrangements. Our loss performance remains strong, with a loss ratio at 35 percent.

On the sales side, we continue to drive our global leadership with a total of $22 billion of new insurance written in the quarter. International new insurance written was up 25 percent to 15 billion, versus last year's 12 billion, reflecting deeper account penetration in Canada and Australia. This penetration improvement is offsetting the impact of the slowing origination markets in Australia and, to a lesser extent, in Canada. We also continue to execute our expansion plans in Europe, as we enjoyed solid new insurance written growth over the prior year. New insurance written in the U.S. declined by 11 billion to 7 billion in the fourth quarter driven by 2 key factors. First, in the bulk market, sales were down 7 billion, due primarily to a smaller federal home loan bank market. As I mentioned, our flow sales were lower by 4 billion due to small origination market and our actions taken in deep cede captive reinsurance arrangements.

Sequentially, U.S. sales are up 17 percent as a result of penetration with our key target customer segments. We believe this demonstrates our strategy execution around recapturing our deep cede share and growing share in higher return segments. In an ongoing effort to grow our markets, we have further broadened our 'HomeOpeners' suite of products by launching 3 new products to capture new home buyer growth and to recapture a portion of the simultaneous second mortgage market.

Corporate and other net operating results declined to a loss of $28 million compared to a loss of $6 million in the prior year, due mostly -- mostly due in the quarter to a $32 million tax benefit in 2003 related to legal entity restructuring pre-IPO. Additionally, we incurred higher litigation costs in the current period due to the resolution of several small matters. These 2 impacts are partially offset by higher expenses in the prior year quarter associated with IPO preparation, and $8 million higher reserve cost in our captive reinsurance company. Overall the surplus portfolio is performing well, and new public company costs are running lower than anticipated.

To wrap it up, we feel good about a strong quarter across the segments. Improving sales in key product lines, solid margins, continued expense discipline across the business, and efficient use of our capital. As we laid out during our strategic update meeting last month, we're well positioned in 2005 to grow earnings per share in the $2.30 to $2.40 range and continue our steady operating ROE progression. With that, I'll turn the call back to Jean to start the Q and A session. Thank you, Rick. Operator, we'd like to turn to the questions and answers. Before we do, I'd like to remind people that we would like you to confine your questions to a single question and one follow up. Thank you.

Thank you very much, ma'am. Ladies and gentlemen, this begins our question and answer session. [Operator Instructions]. Joan Zief, Goldman Sachs. Please proceeded.

I hope that you can hear me. The quality wasn't -- it's really tough to decide what the one question is I'm going to ask. But I think I'm going to ask about your comments about acquisitions. You said that one of the places where you might be able redeploy excess capital is through acquisitions. What are the areas that you think offer the most attractive prospects for you, and do you think that with reinsurance markets tightening, your competitive advantage with the capital solution to Triple X that there might might be actually more blocks of business on the term side coming to market?

Good morning, Joan. It's Mike. Again, just -- let's put this in perspective. Our priorities for redeploying capital are, first, core growth, second, acquisitions, third, share repurchase, and then fourth, looking at our dividend rate over time. Turning to acquisitions, specifically, we do have a dedicated business development team that's active and looks at a number of opportunities. The best areas that we focused on are consistent with what I've talked about on prior calls. One is blocks of business in the life and annuities area. Number two has been focused on where we've looked at things like distribution additions. We bought Hochman & Baker would be an example. A deal we closed in 2004 that brought us some accounting planners who sell package products, so distribution plays like that are quite helpful. And then we also look at things that are both a combination of things like reinsurance and distributional alliances where you can reinsure an existing block and have an ongoing form of a -- form a new business relationship as well. We have not focused on an area like long-term care consistent with my prior discussion. That's an area we 'd rather do our own underwriting in as we move forward. And then as far as more of a platform play, we've certainly looked at the small group benefits area as one where we would like to increase our size and would direct capital that -- that way. Regarding specifically your question about Triple X and influences, I think I'd broaden the question and say that a number of factors can influence whether someone wants to retain a block business or not. It can be their scale. It can be their cost competitiveness. It can be regulatory costs, or, yes, it can be the capital regulations. So any place we have an advantage on those fronts, we will certainly try to convey that advantage to a potential seller of a block of business.

I guess from a follow-up again on this acquisition basis, if it -- if for some reason the GE secondary gets pushed out that there is not an opportunity for you to buy back stock this year for whatever reason, and you do have this build up of excess capital that is quite substantial, does it add greater pressure as the year goes on for you to spend that money quickly and to make an acquisition so that you can actually take that chunk and redeploy it for some positive return?

I'll give you 3 observations on that question, Joan. First, again, we -- we laid out our core growth goals during investor day, and we will work hard to do everything not only to achieve those goals, but to outperform those goals in deploying capital. Number two, on the acquisition front, we're disciplined. We're only going to put capital into acquisitions where we can achieve our targeted hurdle rates, and look at other things carefully. So things like risk management, compliance, and so on, so we're going to maintain that discipline. Thirdly, on a number of calls we've been asked about share repurchase as one of the levers that helps drive ROE. We talked about that at investor day as well. And as I mentioned on some prior calls, there is precedent in the market where in connection with the secondary offering that you would use capital to -- to repurchase shares, and you go through a process to make sure that that's done in a way that doesn't have any potential conflicts. And there are precedents out there. So I'd say, Joan, we have multiple levers, and -- to use here, including costs and investments on the ROE front. So I don't think we'll be overly pressured in one area. But we're going to have to use all of those levers to drive the 38 to 50 basis points of growth that -- or ROE progression, I should say, that we've targeted.

Thank you.

Thank you very much, ma'am. And ladies and gentlemen, just as a quick reminder, when asking your question, if you could please use your handset and avoid using a speakerphone, it would be greatly appreciated. Again, thank you. Geoffrey Dunn, KBW. Please proceed.

Thank you. Good morning. Shifting to the MI side, could you talk a little bit about the credit trends in the international segment, specifically the provision continues to climb up. What are the delinquency trends behind that, and are the paid claims starting to track up like that as well?

Good morning, Geoff. Great question. Let me hand that off to Tom Mann. Tom?

Geoff, good morning. I think that clearly the loss trends in our global operations are trending up, as we have talked about in the past, and that they would, because we have continued to build the size of our in force books there. However, as they have trended up, and we did see a higher loss ratio this year, we would expect to see a somewhat higher loss ratio next year, probably in the 10 to 15 percent range. It is entirely consistent with the expected season of those books. And in that regard, they continue to season, in fact, better than -- than our price in expectations would have them. Predicting in Australia, we closed out the year with, again, a very, very healthy economy. Housing appreciation did slow this year. We expect that to slow next year as well. Probably at about the same levels, around a 4 percent housing appreciation level in 2005. But when we look internationally, I think as we've always indicated that as we move forward, we would see these books begin to grow to their more typical loss pattern, and I think you're beginning to see that. Again, to wrap that up, the loss ratios across the board this year internationally were in the low teens, and I would expect that they're going to move a little bit higher than that, but -- and the range would be 10 percent to 15 percent next year. And one of the reasons for that, again, as Mike mentioned, we continue to grow our unearned premium reserves, and you will see those rolling through on the revenue line as well, so that's going to tamp down that loss ratio as well.

Okay. Then a follow-up in terms of potential acquisitions. There's been a lot of talk in the MI space about consolidation. Genworth's name is thrown out there off and on as a potential consolidator. Is that a route that the Company is willing to take? Or are you more focussed in building out the life operations?

Jeff, it's Mike. First I'll give you a perspective. Again, we've been asked about that on different sides as far as both U.S. and internationally. We really like our core growth strategy that we've had. We haven't -- we have not seen the economics work in the scenarios of domestic consolidation that some of the analyst community has written about and asked about. That's -- also has some history to it when you look at types of market positions, as far as what can be gained versus what could be lost in those types of transactions. And internationally, it's a build. We've got Tom and the team have been working on a build now for a number of years, almost 10 years into it by now, and we think that is the way that international grow through core growth and building. With -- we'll put the capital towards things like Europe that we worked on, Mexico that we talked to you about investor day. And that's how we would see that. So we're -- we'll always keep an eye -- an open mind and our eyes open, but that's our view as relates to mortgage insurance.

Okay. Thank you.

Thank you very much, sir. Vanessa Wilson, Deutsche Bank. Please proceed.

Thank you. Good morning. On the long-term care business, I think, Rick, you were breaking up a little bit, but you did talk about changing your lapse assumptions and taking a gain this quarter related to that. Could you just flush out what the lapse assumptions are, and just what the change in assumptions was? And then I think you also mentioned that your loss ratio has been stable, but if we look at benefits as a percent of premiums, that seems to be climbing. And could you give us a sense of maybe under -- what's going on there?

Sure. This is Rick. Vanessa, break that into the 2 questions you there. First on the lapse assumption, what that was is not necessarily the assumption that we have around the business, it's the process which we record lapses and how that impacts us. So I don't want you to think that our lapse assumptions there have changed and what drove that. So that was more -- much more of a process -- process adjustment there. Secondly, your question on the benefits ratio, there are multiple factors that come through there. And what you will have seen are the 2 one-time items that I mentioned both in the last year, as well as this year, coming in and impacting both the premium line and -- as well as the benefits lines. So you have some noise that's going in there. We do look at our loss ratios. They have been stable across the board and we feel good about that.

And could you just remind us what your last assumption is, just generally?

Vanessa, hi. This is George Zippel. On the loss ratio, we kind of look at it in a 10-point band between 60 and 70 percent and we are comfortably within that -- oh, lapse rate -- I'm sorry, lapse rate between 4 and 5 and we are comfortably within that one as well.

Okay. And that's on your old business and also on your new business?

That's on -- that's an aggregate number for the overall block. The lapse rate assumption for the newer products is 1.5 percent, substantially lower as you might expect.

Thank you.

Thank you very much, ma'am. Ed Spehar, Merrill Lynch. Please proceed.

Thank you, good morning. The first question I have is on the retirement investments business. If you look at the earnings excluding the charge, you would have earnings this quarter that were about $25 million higher than the previous 2 quarters. So, Rick, I was wondering if you could quantify again for us some of the unusual items that we might have -- we might have had in that segment, and then my follow-up is on the long-term care unusuals.

Sure. Let me start with the retirement income investments. Two pieces that you would lay out there on the unusuals, first of all, would be bond calls, which generated about $8 million in the quarter. The second piece that you'd see there is on the guaranteed fund assessment. We actually had benefits there of about $5 million in the quarter. So you can -- you can very quickly pull out those 2 pieces. I think once you do that, I think you'd probably still adjust the run-rate down a little bit more, just for some smaller one-time items that we saw. But those are the 2 big adjustments that you'd make.

Secondly, on the long-term care piece that I talk about. First of all, the adjust we had last year was on a policy valuation conversion that we went through and how that adjusted earnings. The second piece of that was in the current year I talked about with Vanessa, which is just the lapsed process that we go through and the adjustment required there.

But in terms of the earnings impact of the long-term care adjustments, what were the -- what was the earnings impact of those various items, the premium adjustment and then the DAC amortization?

The DAC amortization -- in long-term care? The 2 items we noted were, first, is the adjust with the policy systems which was a $10 million favorable item in the fourth quarter last year, and then the last adjustment in the process was $7 million in the current quarter.

But was the $7 million -- was it -- it seems like there was something else in this current quarter that might have been an offset. In terms of a negative item. Because the premium number looked lower this quarter, is I guess what I'm asking.

Yeah, you're going through the premium line relative to that, and there were some other line items that you're dealing with between premiums and change in reserves. But what I'm giving you are the overall drivers to the business.

And that 7 million's a pre-tax number?

That's a net number.

Okay. But -- okay. But again, I guess -- then the run-rate of earnings for -- is, like, would be $39 million this quarter, which would be lower than prior quarters. Is there anything else, or is that the number you think is the right number?

No, I think that's a pretty good number. I think you have to go back to prior quarters to look at that.

Thank you.

Thank you very much, sir. Mark Finkelstein, Cochran Caronia Securities .

Hi. Good morning. I have a question on the investment side, then a follow-up. At the investor day you talked about shifting the portfolio to a higher concentration of real estate, below investment grade, and private. Just given where we at -- where we are with the nominal level of rate, a flattening of the curve, and extremely tight credit spread, if anything, things have kind of gotten maybe even a little worse over the last six weeks. I'm just curious if this influences the pace of shift in the portfolio? In other words, if we're kind of where we're at over the next several quarters will that shift not occur, or is it planning on still occurring?

It's Mike, Mark. Let me give you a perspective. I'd -- first, I'd take you back to investor day. I think on investor day we were -- we were all seeing that environment by then. And we were pretty clear saying that even as -- as an ROE lever, that during 2005 we would see investment yield at a negative, not a positive, because there's going to be a gradual shift. And if you look at investment yield, we thought it would be more of a positive -- have more of a positive impact on ROE progression as you got out in the 2006 through 2008 time frame. So that's how we built our plan and that is how we are executing the plan so that we make some shifts gradually, we recognize that it's a tight rate environment, and we don't do any -- anything in a a hurried manner that doesn't make sense for the long term. So I wouldn't give you any different outlook than we had at investor day on that, given we had laid that out as having a negative impact. The positive impacts, of course, on ROE we're going to be coming from new business layers and really optimizing our mix, running off low return blocks of business, expense management, and capital management as sort of a neutral to a positive, depending on timing of redeployment acquisitions and things like share repurchase.

Okay. Thanks. Just a quick follow-up. [Technical difficulties] but I just wanted -- if you could elaborate a little bit on the pricing action in the term business. If I heard you correctly, it sounds as though you might be reducing rates at a time when others are forces to increase rates, giving what's going on in the reinsurance markets, et cetera. Do you happen to have a blended average kind of rate movement? And if not, maybe if you can just talk in generalities around what exactly you have done?

You're going to have to -- I'm sorry. We lost you on that one, Mark. We had you going into the term business and then we've lost you. Could you give another shot on the question?

Yeah. If you could elaborate on the pricing action in term. If I heard you correctly, you might be reducing rates at a time when others are forced to raise rates given what's going on in reinsurance markets, et cetera. And I was just curious if you had a blended average, kind of rate change, and if you don't want to disclose that, just maybe talk in generalities around what kinds of rate actions you've taking.

Yes. I'm going to turn that over to George -- George Zippel. George?

As we look at the term market place, the pricing environment has been relatively stable compared with prior quarters. And as we take a look at our multiple levers for growth, we think that our relatively low exposure to the reinsurance market, which as you indicated, is getting hard, as well as our Triple X capital solution give us certain cost and return advantages versus some of our competitors, so we constantly are monitoring the term marketplace. And over the last 12 months or so, we have made selective moves where we thought we could leverage our cost and return advantages in selected areas in the term product line. This most recent one that we are in the process of announcing today cuts across a variety of age categories and underwriting bands, focused on the preferred underwriting classifications and the price changes range anywhere from 2 percent to 8 percent, depending on the particular sale. Again, it's not across the board, it's very targeted and very focused on where we thought we could take advantage of our opportunities.

Okay. That's perfect. Thank you.

Thank you very much, sir. Andrew Kligerman, UBS Securities. Please proceed.

Great. Two questions. The first is on the equity indexed annuity, the $32 million charge. It would be very helpful to get a little clarity on the dynamics, how that formula broke down and what you had to do to fix it. And then the follow-up question is just to get a little more color on the mortgage insurance business in Europe and Mexico. In Europe, what countries? What are you doing specifically in Mexico. What part of Mexico. Why are you going to see big growth there?

Sure. Let me -- this is Rick. Let me start on the equity index annuity. To put it in perspective, first of all, the current reserves on this block are approximately $220 million. We wrote the policies for about 4 years and stopped selling it in 2000. To get some context on how we identified the issue, we were changing processes around the product, and as part of our usual practice take a hard look, we identified some disconnects. Essentially what you had was split responsibilities in accounting for the product. We've since fixed that and this change represents the adjustment to our reserving processes and calculation.

I just -- but what specifically in the accounting? I just -- I just kind of don't -- what was missed in particular? I still don't quite understand.

Sure. What was missed was the fact that the split responsibilities of this were in 2 different places, so you had 2 teams working through it. As they were calculating the responsibilities we needed to bring it back collectively. So as we brought that back collectively, it's under one structure now. It's under one management team and we've fixed it going forward.

Are there other areas where you might have more than one structure just like with this indexed annuity product?

No. That is the only place.

Thank you very much.

Andrew, this Tom, and I always shift over to your mortgage insurance question. Let me remind you of what our global strategy is very quickly. And that is, as we continue to look at the global growth opportunities it has been to reduce our reliance on reliance on our businesses in Australia and Canada for growth, although those continue to be very strong growth engines for us. In that regard, I'm not going to break out the individual countries in Europe for competitive reasons, but as we've indicated in the past, we do have our feet on the ground in 9 of those countries, and we do have business actually flowing in 6 of those 9 countries in Europe. And our progression on customer signups, if you will, the execution of what we call master policies and in new insurance written levels that we are achieving there continues to be very good and is growing at basically a doubling pace. Now, that will not continue forever, as we continue to grow. One way to think about it is that if you look at our new insurance written numbers for this year, over 10 percent of that production came from Europe.

With regards to Mexico, that's again, consistent with our -- what we call our rest of the world strategy. We have been -- we're very familiar with the market in Mexico, back through our GE days, and we have been working with the Mexican government to put together a program to ensure loans or introduce mortgage insurance into that environment. It will be done in connection with the Mexican government. They will be the primary insurer. And we will be participating on a reinsurance basis with them. We are very hopeful that that program will be off the ground in the first quarter of this year. And again, when you look at derth of home ownership in Mexico, and the lack of housing finance in Mexico, we're very hopeful that it will be a nice growth opportunity for us.

Thanks a lot.

Thank you very much, sir. Jason Zucker, Fox-Pitt. Please proceed.

Great. Thank you. I just wanted to ask a question about excess capital and then I was hoping to pass it over, so instead of a follow up, I was going to pass it over to Ed Groshans, who had a question on mortgage. With respect to the $700 million that was released, the question there is, is there more to come? And also, did that $700 million, was that included in your billion dollar excess capital position comment?

Hi, Jason, this is Rick. Let me start with the second half of your question first, which is that $700 million was not included in our excess capital calculations. We had already anticipated that coming -- coming up from the mortgage company and then flowing out to pay out -- off our contingent note. So that's already excluded there. The first part of your question is, are you exploring more areas on that particular front. I think that as we look at capital overall, we continue to look at all of our lines in terms of where we have excess capital that we can take out and redeploy more effectively.

I guess then more specifically, are there other places that you see opportunities to release on this kind of -- on a material level in 2005?

This is Mike. As you -- I'll just echo Rick's comments on that. I mean, fundamentally, and we talked about some of these in investor day, we focus intently in an area like mortgage insurance, but that's over a number of years to find ways to release excess capital and redeploy that capital. But in our other product lines, as exemplified by focus the on Triple X, we've always tried to drive capital efficient product designs. And if those can be applied to new products, that's one option. And if those can be applied to blocks of business or a structure like Triple X, that's another. So nothing specific there. But it does get intent focus on a broad basis, as Rick talked about.

Okay, thanks. And let me just pass it over to Ed.

Good morning. I just had a question really concerning the mortgage insurance area in the U.S. side. And I just wanted to get a sense of the 2003 book, the seasoning patterns you're seeing there, it's one of the largest books of business that's out there. And my understanding is maybe we're seeing better seasoning patterns in that book than were originally expected.

Ed, this is Tom. And again, thanks for the question. The easiest thing for me to tell you is everything you said is right. The 2002 book was a relatively large book, given the refinancing environment that we had there. As we have rolled through the end of 2004, and as we look at 2005, it is indeed performing, if you will, below that bell curve that we normally expect our performance -- that we expect all these -- our books to perform at, so.

And that's to the 2003 book?

It is.

Okay. Good. And also, let me just, I do appreciate you staying away from the deep cede captive business. I think that's a good deal. Thank you.

Okay. Ed, I didn't hear your question all the way, because we got blocked out, but it was a compliment, so I wish I had have heard it. But I'll turn it back over to Jean.

Thank you very much, sir. Pablo Blinchik [ph], Lehman Brothers. Please proceed.

Actually, this is Eric Berg. Good morning to everyone. In the domestic -- 2 questions. In the domestic mortgage insurance area, in the data that we can see, what is the -- what -- in the data, again, that is available to us, what are the numbers that you think sort of support the case that the, sort of the slide in the size of the business is slowing and hopefully reversing? That would be my first question. Because it looked to me like the risk in force and the insurance in force continued to decline essentially at the same pace that it had been. And then, a question in the long-term care area, and it is what is -- how does the new product at that you're rolling out differ in a way that you are hopeful will allow you to revive sales? Thank you.

Eric, again, this is Tom. Couple of comments on your -- the NIW comment. As you know, in each quarter of this year, we saw a lower level of flow in the insurance written as compared to 2003. When you look at the fourth quarter, you did see a relativity -- relatively -- a reduction if you will, in the net comparable negative V percent, if you would. Well, and also as importantly as you look at the fourth quarter, what we are very attuned to is that we actually had a sequential increase in our new insurance written from about 17 percent from third quarter to fourth quarter. So what I would suggest you do is all the -- is the industry reports and as we look at the size of the market we had in fourth quarter, we think that's going to indicate very tangible progress with our strategy of optimizing our business mix around the shift mix to higher return segments that Mike mentioned in his earlier comments, our actions to recapture the 80-10-10 [ph] market, and also the actions to recover business from our deep cede captive reinsurance transactions. So I think it's an early indication. It will have to have the whole industry report to see that. But I think we feel pretty good about it, and as we move into next year, I think we are expecting to see positive NIW growth as a result of these actions.

Thank you.

Let me turn -- Eric, I'll turn to George Zippel on your long-term care and new product question. George?

Good morning, Eric.

Good morning.

Not to reveal the secret sauce of a product that we're going to be rolling out in the next few months in too much detail, but to give you a sense to your good question there, what consumers are asking of long-term care companies in the current product scheme are 2 things that we hear. One is simpler products and second are products that are more affordable. As the industry has gone through in force premium rate hikes and the most recent series of new products that have come out are basically the same set of features, the same product chassis, but higher price points. So we see an opportunity to simplify the next generation of product by making consumers -- or having consumers make fewer choices with inside the product that they select. On the affordability side, what we want to do is hit price points that they're used to, that they were more comfortable with, without compromising any of the benefits that they've come to expect from the product. And we think we can do that with multiple product offerings versus just the 2 that we offer today. So a combination of focus on simple, affordable, and giving them more product choices to meet those needs we think will satisfy them and help drive growth.

And just to [technical difficulties] George, is the -- is the product that you've described cheaper, simpler, and therefore more attractive to the consumer? Is it being rolled out right now? I thought it was, or are you --

Eric, are you on a speaker? We can't -- you're breaking up.

I'm sorry. I'm sorry. Can you hear me now?

Yes, we can. Thank you.

Yes, Eric. I think I got the gist of your question. This is George again. Is that product being rolled out now? The product that I just described is one that is currently under development that will come out sometime later this year, which is why I'm keeping it on a kind of a general level.

Thank you.

Thank you very much, sir. Again, ladies and gentlemen, as a quick reminder, when you are asking a question, pick up your handset and avoid using a speakerphone. That would be greatly appreciated. Steven Schwartz, Raymond James. Thank you.

Good morning, everybody. Two questions like everybody else. A question for Tom on domestic mortgage insurance persistency. It looked like it went down. Maybe you can comment on that. But first, I would like to ask -- Rick, I'd like to go over the equity index annuity reserve processes adjustment again. Rick, maybe -- you can answer yes or no. My best guess here is that somehow or other you discovered that the minimum guaranteed surrender value on your index products was actually higher than the index account value that you had. And you had been basically in your financials reflecting that index account value, is that true?

I would say no.

Okay. All right. Well, that was my guess. Care to comment further on that or just leave it as like you left it with Andrew?

No, I think I'll leave it there. I think I answered the question in terms of how it happened and why it happened.

Okay, Tom could you talk about domestic persistency?

Yes, I sure can. I assume when you mentioned it went down you're referring to the 65 to 64?

Yes.

Yes, and I just -- I would call that just market noise. I think with the interest rate trend that we saw last year and the fact that -- that mortgage rates -- the movement of mortgage rates in the fourth quarter, we expected that and I hope that that answer will be okay. We are looking next year, though, with the market projections that we do see next year, hopefully what we're banking on is about a $2.2 trillion market, with interest rate movement back up into the 6s low 6s, in all probability, but that will push our persistency next year up into the mid to low 70s.

Okay. The persistency that you just cited, that was versus a year-ago, correct?

That would be our annualized persistency. When I gave you -- our total year persistency was 65 percent. That would be for the total year.

Okay. Just look at the fourth quarter versus the third quarter, was there a significant down move in persistency? Or am I just figuring this wrong?

I don't believe so. I could look into that and get back to you. But I don't believe so.

Okay. Great. Thank you.

Great, thank you, sir. Colin Devine, Smith Barney. Please proceed.

Good morning. I'll focus my question on Mike. Mike, you talked about the billion dollars of potential capital that you're going to have. It strikes me -- in a way, are you talking sort of out of both sides of your mouth in a sense where you've got this extra capital, and you want to do acquisitions, but on the other hand you're also talking about using it to manage the secondary from GE. And I go guess --

Colin, are you on speaker?

No, I'm not. You guys have a really bad phone hookup. And -- so what is really the intent for the capital, and are you really sitting on the side lines in fact in terms of deploying it and doing any sort of M&A stuff until GE decides when to bring the secondary to market?

Well, Colin. You know me, I don't tend to talk out of both sides of my mouth to begin with. With that in mind, we laid out, I think, quite clearly a growing amount of excess capital at investor day. And we can do multiple things. We can grow faster than what we laid out and fund that. For the size of deals that we're looking at, and we have a very active pipeline right now, we can fund those, and we can still have capital left over if the opportunity arises for a responsible repurchase plan. So think of that as a multifaceted set of options, which is certainly what I'd rather be sitting with than a limited set of options.

Then perhaps could you just clarify some sort of dollar range on the size of deals you're looking at, per your comment?

Well, the -- when we talked -- and this is consistent with what I've talked about in some prior conversations, is the types of deals we have looked at are in the hundreds of millions of dollars ranges.

Okay. And do you have any sort update to offer on where GE stands?

No. I think, GE got the question on their call, and said that they were going to look at their options later in 2005, so I have to defer to GE on that.

Okay. Thank you.

Thank you very much, sir. That concludes our Q&A session for today. I'd like to turn the call back over to Jean for any closing remarks.

Thank you. We thank you all for joining the call. We apologize for any technical difficulties and will be happy to follow up for any questions you need clarified as we go forward after the call. Thank you.

Thank you very much, ladies and gentlemen, for your participation in today's conference call. This concludes the presentation and you may now disconnect. Have a good day.