Genworth Financial Inc (GNW) 2005 Q1 法說會逐字稿

Good morning ladies and gentlemen, and welcome to Genworth Financial's first quarter 2005 earnings conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the presentation over to your host for today's call, Jean Peters, Senior Vice President, Investor Relations and Corporate Communications. Ms. Peters, you may proceed.

Thank you operator. Welcome everyone to our first quarter 2005 earnings conference call. Our press release and supplement were both released last evening and are posted on our website as are the slides we will be using this morning. Our CEO, Mike Fraizer will discuss highlights of operations, our 2005 outlook 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 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 were asked to read and acknowledge your understanding that these elements can change as conditions change and we ask that you interpret our comments in that light. Today's presentation also includes the use of non-GAAP financial measures that we believe may be meaningful to investors. These non-GAAP measures have been reconciled to GAAP where required in accordance with SEC rules. With that let me now turn the call over to Mike Fraizer.

Thanks, Jean and good morning everybody. Genworth is off to a great start in 2005 with strong results from all segments and good progress on our growth initiatives. Our momentum from 2004 has carried into 2005 and our businesses are executing well. In addition, we completed a highly successful secondary offering during the quarter, helping GE sell down 80.5 million shares of stock while also executing a $500 million repurchase of more than 19 million shares as part of the transaction. We're very pleased with our expanded and high quality shareholder base including continued support from several of our largest holders from the IPO as well as a terrific complement of new investors from the secondary transaction. Our non-GE float now stands at more than $6 billion with good additional trading liquidity and average daily volume in our stock has increased nicely. GE's holdings are now 52% of total shares outstanding and GE is well positioned to achieve its stated goal of getting below 50% by the second anniversary of the IPO at the end of the May, 2006. With our 500 million share repurchase we were able to effectively redeploy a good sized trannche of excess capital while still retaining more than $1 billion of excess capacity as we look in a disciplined way for additional internal growth opportunities and potential acquisitions. We also expect to reassess dividend policy and additional share repurchase opportunities later in the year.

While we spent a couple of weeks on the road show for the secondary, the real excitement is occurring as the progress -- in the progress we are making in building on our growth platforms. Total net operating earnings in the quarter were 326 million or $0.66 per diluted share up 34% over the prior year. While results in the quarter included some favorable items, underlying segment performance was solid. We saw double digit earnings growth in seven of our nine product lines with strong results in our international operations. We also had about $0.06 of favorable items we don't view as trendable during the quarter. Rick will go over these in some detail in a moment along with a full review of first quarter numbers so I will focus my remarks on operational highlights, a few key strategic areas, and our overall earnings outlook.

We continue to help cast a broad protection safety net for consumers with good growth in life sales and European payment protection. In long-term care, we had stable sales despite disruptions from competitor market price changes and independent distribution channels rebuilding their focus on the product. Total life sales were up 14% over the prior year and nearly 8% sequentially, driven by our recent pricing actions in term life, new product introductions in universal life, distribution expansion, and ongoing service initiatives. Our competitive pricing in term life is also delivering higher premium per policy as customers are taking advantage of our rates to buy more coverage on average than we have seen historically.

Long-term care sales have clearly stabilized after the downward shift we experienced in 2004. We were flat on a quarter to quarter and prior year basis. We were pleased that we maintained sales stability even though we just completed new pricing introductions during the fourth quarter and the last five key states targeted for this project generation. In addition, we carefully maintained our risk management and underwriting disciplines but clearly we are disappointed that we did not achieve sales growth in the quarter.

We're pursuing a five part growth strategy for long-term care including increasing recruiting and sales productivity in our dedicated career agent group, adding relationships and driving activation in our independent distribution while working to offset impact from two major distributors who are trying to rebuild their focus on long-term care, introducing targeted new products and features, enhancing processes and technologies that improve ease of doing business and finally pursuing investment strategies to optimize performance in the challenging low rate environment. Now, underlying this strategy is active involvement on the public policy and consumer education front in support of long-term care.

As we have said in prior conference calls, we are positive in our multi-year outlook for long-term care and we are investing in growth and executing to capture the opportunity. Near term we are more cautious on our 2005 sales outlook and may see only modest growth as the market continues to establish a new foundation. Closing out our protection segment, payment protection performed very well, adding 13 new distribution relationships and delivering double digit income and sales growth and we continued to gain sales momentum in our small group business.

Turning to retirement income, the overall business continues to demonstrate solid fundamentals. Operating earnings in the quarter doubled over the prior year from growth and assets under management and higher spreads, even beyond the lift from investment bond calls and prepays. Total AUM in retirement income and investments was up nearly 10%. Stable assets in our institutional block were a positive as the ongoing runoff of old low return GIC blocks and short term funding agreements was replaced with GIC backed notes and other new product structures. Fixed annuity sales picked up nicely in the first quarter from the end of 2004 and were down about 11% from the year ago quarter. On this note, fixed annuity sales continue to be influenced by a combination of pricing discipline and competitive conditions and sales levels will depend upon whether we can achieve targeted spreads.

Income series sales of $86 million more than doubled over the prior year quarter and were about even with the fourth quarter which reflected strong February and March performance after a slow January. We continued to see increased producer acceptance for the product overall and the markets need for a defined income plan with market upside is growing stronger. That's why we were pleased to announce this quarter our innovative group annuity called Clear Course, a new version of the retirement answer product we successfully launched in our retail channels that has been carefully tailored to the defined contribution market. Genworth's new offering enables 401(k) participants to chart a clear course to their retirement by buying layers of guaranteed lifetime income with market upside potential amongst their various 401(k) investment options. Equally important, the investment option is designed to be portable, allowing participants to create their own retirement pay checks regardless of the number of times they change jobs.

Since we announced this product in April the response from plan sponsors and benefit consultants looking to learn more has been very positive. We have assembled a tremendous team to take this product forward over the next several years, confirming Genworth's intent to continue as a leader in the income distribution market.

Now let me turn to our mortgage insurance segment, where we had continued strong growth in the international arena and good news in our U.S. operations with respect to delinquency performance. New insurance written was up $2.2 billion or 12% in the quarter to 19.9 billion driven by strong international sales. This growth included about 600 million of foreign exchange favorability. Absent FX, total NIW grew 9%. Internationally we continue to strengthen our position in both Canada and Australia as well as in our European operations where we are the leading flow business player in each of the countries where we operate. In Canada our flow NIW grew despite a relatively flat overall origination market.

Last week both our sole governmental competitor and Genworth announced a 15% price reduction for greater than 90% loan to value mortgages. This pricing action is consistent with our strong long-term performance expectations in the Canadian market. While this could have some impact on our total new business premium levels, we expect to offset this with additional growth. Overall we believe our returns will continue to be strong.

In Australia our flow NIW was up driven by additional account penetration and modest market growth. We also added 1.3 billion of prime bulk business in Australia and will selectively write additional prime bulk business in this market. Our European operations expanded nicely with four new customers in the quarter and NIW remains on track for strong double digit growth.

On the earnings front, international MI benefited from completion of a policy cancellation study in Europe. This added about $0.01 of EPS as unearned premium was released into revenue. Total unearned premium reserve internationally grew again to 1.6 billion from 1.5 billion at year end 2004. In the U.S. MI market NIW was down 16% primarily due to the smaller market for traditional mortgage insurance partially offset by deeper penetration with existing customers and our actions to capture attractive new market segments.

We made nice progress with our Home Openers offerings designed to recapture some of the market loss to simultaneous second mortgages. We're on track to achieve 500 million to $100 billion -- to $1 billion, excuse me -- of new sales from these products this year. The earnings story in the quarter in the U.S. MI however was driven largely by highly favorable delinquency experience. Total U.S. reported delinquencies were down 14% sequentially from the fourth quarter, with improvement across all books of business, products, and geographic regions. We typically expect to see modest seasonal declines in delinquencies in the first quarter but this result was better than expected. We believe there were a number of contributing factors including healthy growth in GDP, lower unemployment claims and ongoing market appreciation. As this was exceptional delinquency performance and it remains early in the year, we think it is premature to bake this upside performance into our total year outlook.

Stepping back, let me put the quarter performance and total year outlook in perspective. The broad based strength across our three segments confirms our strategy and focus on disciplined execution. Core growth performance was strong across the majority of our product lines. We started the year with a guidance range of $2.30 to $2.40 net operating earnings per share and 30 to 50 basis points of operating ROE progression excluding investment extraordinaries and forward-looking views of FX impacts.

To date we have experienced three positive factors impacting our full year outlook. Investment extraordinaries of $0.03 a share, a benefit of approximately $0.05 from our 500 million share repurchase and a penny a share from our European mortgage insurance cancellation update. We also benefited in the first quarter from the timing of various business and corporate expenses, foreign exchange, and the highly favorable mortgage delinquencies.

Looking ahead to the rest of 2005, we see four key factors balancing our strong growth and 1Q positives. First we see expense timing and strategic program impact of $0.02 to $0.03 a share, which Rick will touch upon. Second, there is the impact of ongoing dilution from our mandatory convertible as well as from the effect of stock based compensation with the majority of that coming from the mandatory convertible. For example, on a modeling basis a $30 average stock price drives about $0.05 of dilution. Third, we see a challenging investment environment and low interest rates, which includes some potential for lower persistency in mortgage insurance. And finally, we have a slowing long-term care income profile in 2005 driven by lower sales and again the investment environment.

In total, this would place us firmly at the top end of the guidance range for both net operating EPS and ROE progression. This excludes any foreign exchange impacts, additional investment extraordinaries or sustained mortgage insurance delinquency favorability. As the year progresses, we will continue to re-evaluate our earnings outlook and provide updates when appropriate. In sum, we're very pleased with the quarter and with that I would like to turn the call over to Rick McKenney for details. Rick?

Thanks, Mike, and good morning, everyone. We are off to a strong start to 2005. So let me review our segment results in more detail. In my comments I will be comparing 2005 actual operating earnings with 2004 pro forma operating results.

Let me take you to the operating segments' performance. Beginning with protection, operating earnings had solid growth of 13%, an increase of 16 million compared to the first quarter of 2004. Growth in earnings from life insurance products drove much of the segment's improvement, increasing 19% to 68 million. Strong in force growth from new term life sales, along with favorable mortality and improved persistency, contributed to the solid results.

In our universal life business our disciplined crediting rate actions have resulted in improved spreads. This more than offset an uptick in UL mortality this quarter.

Earnings in long-term care are up $3 million for the quarter driven by an experienced refund on a reinsured block. Excluding this item results were flat, reflecting stable growth in the in force block that was offset by a modest decline in policy terminations and a continued challenging investment environment. Importantly, claims and loss ratios continued to be within our expected ranges.

We expect the overall earnings profile for our long-term care to be about flat in 2005 before the anticipated lift from their experienced refunds on the reinsured block. We remain confident about the fundamentals of this product line as new higher margin business becomes a greater percentage of our overall in force mix.

In payment protection we had a solid quarter with operating earnings up 10% from new business growth across Europe. In force performance including loss and expense ratios remain within expected ranges.

Now looking at sales, the protection segment had a strong first quarter overall with four of five products turning in double digit increases. First in term life sales were up 12% compared to prior year and 7% compared to the prior quarter. We are seeing a positive market response to the pricing actions we mentioned on our call in January. This combined with the expansion of our distribution relationships and service initiatives positions us well to deliver strong results in 2005. We continue to build out our universal life product offerings, adding two new products during the quarter and we are seeing positive signs of acceptance from our distribution partners. UL sales were up 18% compared to Q1 2004 and 8% on a sequential basis.

Long-term care sales were flat versus prior year and sequentially. We are through the last portion of our product and pricing roll out having launched in five key states in the fourth quarter without any noticeable impact to the first quarter volumes. For the full year we are more cautious on long term care sales growth than we were in December and may see modest growth overall. Here (ph) on (ph) protection made solid gains in its core sales up 31% or 22% adjusted for FX. We are seeing strong growth throughout Europe in both new and existing client relationships. Group sales were up 15% year-over-year as we execute on our sales growth strategy in our lines. The variance versus the previous quarter reflects the seasonality of this business. In summary a solid quarter from both a sales and earnings perspective for the protection segment.

Moving to retirement income and investments, operating earnings doubled from 30 million in 2004 to 60 million in the current quarter. Spread retail earnings were 34 million versus 16 million in Q1 2004. Earnings growth was primarily driven by higher assets under management which grew 9% to 21 billion. Spreads continued to improve even excluding unusual investment items. Additionally the year-over-year comparison reflects about $4 million of favorable DAC variance related to recognizing the impact of prior year portfolio gains. Results in the quarter also included $3 million of higher calls and recoveries. Fee based operating earnings were 17 million double prior year.

Assets under management grew 37% with the bulk of the growth in third party managed assets and variable annuities where we are rebuilding our asset base. This increase in AUM drove 3 million of higher net fee income. We also saw a $6 million decline in expenses mainly from higher costs in 2004 as we prepared for our corporate reorganization.

Net operating earnings for spread institutional products increased 50% to $9 million in the first quarter of 2005. Growth was driven by improved spreads of $2 million. We are seeing stable institutional AUM. 9.4 billion at the end of the first quarter although underlying this is a mix shift in new higher margin contracts replacing the run off of older low margin fixed GICs.

Now let's take a look at sales for this segment. Overall sales in RI&I were a mixed story reflecting the interest rate and competitive environment. In fixed annuities sales were down 11% compared to the prior year but up 29% compared to the previous quarter. We will continue to see uneven results in this line as we remain disciplined in our pricing only adding new business when spreads meet our hurdle rates.

In both immediate and structured annuities we saw flat to down performance compared to the prior year. Given the competitive environment, current low interest rates and increasing anticipation of rising rates, sales in these products will continue to be challenged in the near term.

Turning to fee based products, we had good performance in income distribution series products where sales doubled over the prior year to $86 million. We also saw strong growth in third party managed assets. Our spread institutional business continues to be opportunistic where we originated approximately $350 million of new contracts. All-in a strong quarter in operating earnings growth for retirement income and investments combined with disciplined execution on the sales front.

Turning to the mortgage segment, results in the first quarter were strong in both our domestic and international operations with total operating earnings up 37% to 141 million. International mortgage insurance earnings were 69 million up 57% from the prior year. Results included about 15 million associated with growth from higher insurance in force and favorable earnings emergence on in-force policies as claims levels remain low. Additionally we had the 6 million benefit from the completion of a cancellation update in Europe, which released a portion of the unearned premium reserve. Favorable foreign exchange also contributed $4 million to earnings in the current quarter.

Turning to our U.S. mortgage insurance operations earnings were up 22% to 72 million. About 9 million of the earnings increase is attributable to unusually low losses in the quarter, principally driven by lower reported delinquencies. This pronounced shift in delinquencies was not something that we anticipated. Although our experience does not appear to be unique in the industry and we are encouraged by it we will continue to evaluate the impact of these trends on earnings along with the developments in the overall economic environment. Finally, results in the current quarter also included about $4 million of lower expenses both from lower volumes and overall expense efficiencies in the business.

Looking at sales in the segment, our mortgage segment continues to drive our global leadership with a total of $20 billion of NIW in the quarter. International new insurance written was 14.2 billion, up 30% versus 10.9 billion in the prior year quarter reflecting deeper account penetration in Canada and Australia as well as our steady build in Europe. This more than offset a flat origination market in Canada. Sequentially our international NIW declined 7% due to Canadian seasonality. New insurance written in the U.S. was 5.7 billion in the first quarter down 1.1 billion from last year primarily due to a smaller MI flow origination market and a smaller federal home loan bank market. The U.S. flow market decline was partially offset by increased penetration of our key customer segments. We saw some early progress in our Home Openers products and expect that to accelerate in the second quarter.

Shifting to the corporate and other segment net operating losses were 14 million an increase of 2 million compared to the prior quarter. Let me break this down for you. First profits from the run off business in our Bermuda reinsurance subsidiary declined 6 million. Second we had a small increase in our corporate interest expense of 3 million. Next we had higher taxes, mostly due to a $4 million benefit recognized in 2004 and finally we had significantly lower expenses. Of the $13 million of favorability, 10 million was due to pre IPO costs.

Touching on investment performance, the yield of our portfolio excluding extraordinaries was stable at 5.3%. The rundown in yield is occurring as we laid out at investor day but floating rate assets and investment projects have offset that impact.

Looking ahead we expect the run rate of the corporate segment losses to increase for the remainder of 2005, from timing of planned expenses such as branding and additionally we expect to see lower investment income from the share repurchase and from partnerships.

In summary, the business is performing well. We feel good about progress on sales, product development and distribution. Our capital redeployment strategy is on track and operating metrics across the product lines are solid. Our guidance for full year results is at the top of the range as we set out last December and we feel great about how the business is positioned. With that let me turn it back to Jean to open up for questions.

Thanks, Rick, and operator, we are ready to go to the question and answer portion of the call.

[OPERATOR INSTRUCTIONS] Our first question comes from the line of Ms. Vanessa Wilson of Deutsche Bank. Please proceed.

Good morning. Mike, in your opening comments you made some reference to considering more share repurchase in the future and how does that relate to the 52% ownership by GE? And could you also, maybe Rick could review now that you've done the share repurchase with the secondary, what does your capital position look like today and where do you expect it to be at year end?

Vanessa, let me first start with the end of the question and then I will take the first part. The repurchase that we executed as you know was done using sort of a window of opportunity as GE is sold down because until GE is below 50% we do not have the ability to have a standing repurchase program. The 500 million size was attractive for us and it created about 30 basis points of ROE lift and we think was executed quite effectively. Now, we used an amount of capital, though, so that we still had additional capacity available to drive core growth and pursue acquisitions as two prime levers. So even after utilizing that 500 million we have $1 billion currently of additional capacity between excess capital and excess debt capacity. And we will expect to rebuild that 500 million that we used on the repurchase as we move through 2005. So you would expect to end up higher by 500 million at the 2005 if none of that was used. Again, the priorities are for additional core growth and acquisitions that we're working on. As far as other repurchase opportunities, we'll look at them as situations arise. We don't know the timing of GE's sell downs but as we demonstrated, that is one of the options amongst many to use your excess capital capacity so it is certainly one we will consider.

Thank you.

Thank you very much, ma'am. Ladies and gentlemen, your next question comes from the line of Ed Spehar of Merrill Lynch.

Thank you. Good morning. I want to understand a little bit better the long-term care earnings progression. Rick, I think you said that the expectation for this year would be earnings flat, excluding the experience refunds which I think are expected to continue at a similar level in subsequent quarters, at least this year. That does imply that there is a ramp up in the underlying earnings of the business in the next few quarters, and can you explain how that's going to occur? And then a related question, when you think about the new sales outlook, if you look into '06 and those experienced refunds are going away which looks like about 12 million after tax if we continue at this kind of quarterly level, can you grow earnings in '06? Obviously I am not looking for any specifics, but are you going to have enough in terms of new business and the performance of the in force block to offset that drag in '06? Thank you.

Let me break that down. There's multiple levels of question in there. If I start out to talk about this year, I think you articulated it well and the way that we laid it out there was that the lift in this current year will come from the experienced refund off that block of business we reinsured. We will expect that to wind down more over next year as that goes down. So that piece of it is clear. If I look to the underlying business, what we have articulated, which I articulated, was really more of a flat story this year reflecting some of the lower sales that we've been seeing going back over the lastcouple of quarters I should say flat sales but lower than our expectations. And taking that forward we'll look into '06 as that block continuing to grow as the performance of it goes. Whether that offsets specifically the experience refunds that we realized, I really wouldn't want to speculate that now. But you will see growth in the underlying core business going out into the future.

If I could just follow up just a general question about the earnings guidance, I am still a little bit unclear here, I guess. If you look at the top end of the guidance and you see what that implies for the quarters for the balance of the year, it's like $0.58 a quarter and I hear everything you're saying about the negative items that you have in the next few quarters, but you also have a pretty material benefit from the share repurchase over the next few quarters and I guess what I am hearing from you guys is a pretty generally an optimistic tone about the overall business so I am just trying to put all that together and understand how that implies $0.58 quarters. Thanks.

Ed, it's Mike. First let me take one of the items you brought up which was the repurchase and give you a way to think about it. The repurchase as I said was about a nickel accretive. What you also have to sort of match with that repurchase is the impact of the ongoing dilution from the mandatory convertible. You see that in our capital structure referred to as equity units as well as the effect of the stock based compensation; though as I mentioned, the majority of the impact would be from the mandatory convertible. And that's something I think you have to sort of factor in. You have to model what you think of course the average stock price would be and hence I gave you for a modeling example $30. That's a nickel dilutive, so those two wash through.

Here is the way we looked at our guidance. We've always wanted to have sort of a consistent basis for stating guidance and hence when we put the $2.30 and $2.40 range out there, we excluded both investment extraordinaries and forward-looking views of FX. And again, consistent with that we're still excluding those. The businesses are executing well. And we do have though as I mentioned some expense timing differences and we're still dealing with a challenging investment environment. I don't think any of us thought we would be having a call today with a ten-year at 4.15 when you looked at where we started it this year.

So that's why we think the positives are very clear and we feel good about those. There are just some balancing factors that keep us at the top end of that range again excluding FX, excluding additional investment benefits, and excluding the favorability that we saw in mortgage insurance delinquencies. So listen, we'll take another look in the second quarter. We'll get another quarter under our belt and with that under our belt we'll update you appropriately.

Thank you.

Thank you very much, sir. Ladies and gentlemen your next question comes from the line of Mr. Geoffrey Dunn of KBW. Please proceed, sir.

Thank you, good morning. Just a couple questions on the MI side where I think there's a number of things to talk about. Can you talk a little bit about the expense ratio in the domestic business, material improvement there probably linked to some of the production levels; but what are your expectations for your ability to manage that expense ratio throughout the remainder of the year?

Let me turn that over to Tom Mann.

Geoff, again, how are you today and thanks for the question. Again, we did have the improvement year-over-year for the reasons that we've stated in the past. One is related to production, the reduced level of contract underwriting expense related to lower volume. But as importantly our continued efforts in the business to drive what I would simply call base cost productivity. You're actually seeing the results of that in those year-over-year numbers. We gave you guidance that we have a long-term -- short and long-term objective for that matter of driving at least 2 to 3% point reduction in our expense ratio in each year and all the years in 2005, 6, 7, and 8, and so on and so forth and we're on track to do that.

Okay. Tom, maybe you can also talk about the pay trends, if we look back over last year's delinquency development it looks like we're setting up for a year that should trend downward from the first quarter. Is that in keeping with your expectations?

Jeff, is that a United States question?

Yes.

You're talking about paid claims?

Correct.

Again, the guidance we've given you on a total year basis, and I hope this will answer your question, we're looking for anything from 155 to 165. Let's just assume that the midpoint of that would be at about the 160-ish range. That's going to be marginally up over what we had in '04 and again, that's consistent with the seasoning of the books. The majority of those claims as you would imagine are really related to our 2002 and prior books as they are now rolling through their higher loss claim payment period.

Okay. It just seems like that information is maybe a little conservative when you see the development of the delinquency inventory. So is there an expectation that severity is going to continue to kick up that causes that guidance to be unchanged?

If I look at the '05 projections that we have provided you on paid claims I am relatively confident with those. To the extent that we -- similar to the first quarter and while it's too early to call it on the year -- to the extent that we continue to have favorable movement in the delinquencies, you would begin to see that impact on paid claims in our outer years. Our inventory of existing delinquents today and this would be the case with all of your mortgage insurance players gives you the ability to make reasonably accurate projections on your paid claims. Any future benefit or reduction comparatively -- reduced levels of paid claims I think would really be determined by what we have in our inventory of delinquents at the end of the year.

Okay. And then last question, on the Australian growth I think rates continue toclimb. I think another rate change is expected for June. You're doing a good job penetrating those accounts. But do you expect the flow market there to be down year-over-year with a total offset maybe coming from opportunities in the bulk market?

Well, three little points there. Yes, there was an increase in the rates this year. That's the first that we've seen in the Australian market since the '03 time period. There is some speculation that there may be another 25 basis points increase later in the year. We do project the level of originations or housing finance levels in Australia to your point to be relatively flat. But we do think that we will grow in the Australian market on a flow basis this year because of continued penetration certainly not at the same levels in the past. With regard to the bulk business as you recall it is prime bulk business there and it is insurance and 80% and below loan to value loans. We will probably do a bit more of that this year. But, again, it's not a core part of our strategy to grow that. We do it as a combination and with our customers or said differently to be a fully value added player with our customers to the extent that they need it. We will provide that insurance. Tends to be tighter priced, returns not as attractive, and so therefore, we don't put it at the top of our list of things to do.

Thanks, Tom. Good quarter.

Thank you, Jeff.

Ladies and gentlemen your next question comes from the line of Mr. Colin Devine of Smith Barney. Please proceed.

I have a couple questions. Just to clarify for sure on the long-term care what you're saying the underlying earnings rate here, then absent the experience refund, is it 39 million a quarter? That would be question one. Question two, Mike, in your comments you sort of recapped a couple of the major one-timers. Rick then laid out at least half a dozen others. I was wondering if you might comment on what you view is the -- what was the underlying core earnings run rate that Genworth put up this quarter? And then lastly, a bit of a strategic question. As I look at your company it seems to me it's probably in more business lines than any other company that I cover, and I just wonder if you could comment on the strategic value to Genworth of something like continuing to participate in the group insurance business domestically since it is such a small part of your earnings.

Colin, good morning and three great questions. Let me first turn it over to Rick on some of the run rates and then I will come back on some of the strategic ones.

On the long-term care you asked for clarification around that or if you heard right, and I think that was pretty consistent it would be flattish, probably high 30s to around 40 for the core business for the remainder of 2005 I think is pretty reasonable. From the one-timers, I think many of the one-time items that I laid out were 2004 impacts, Colin, which I don't think will impact necessarily your core earnings outlook for the overall year. The articulation that Mike had of pulling out different items for the core we can give you a first quarter core look which is in the $0.60 range on how the impact of that will look, as Mike said to Ed's comment, looking at some of the items which will balance that over the remainder of 2005. That's really how we would look at it. Turn it back to Mike on the group question.

So from your perspective what you're saying on a run rate basis, this was a $0.60 quarter?

In that range.

Thank you.

Colin, just on your last point, in each of our three areas of course we have both established platforms and we have seeds that we're planting for the future. If you look at Protection we have a very established life platform, a very established payment protection platform, as well as long-term care; and we had really moved towards the small group market to plant a seed for the future looking at some of the demographic shifts towards growth of jobs in small businesses. Some have also where the Latino shift was when you look at the Latino penetration of the small business market and that is an area where many people get their first exposure to insurance. So this is a business that we would certainly like to get to a bigger size. It is one of our candidates we have on the acquisition front but there's also a business that we've invested heavily in technology and new products and service platforms to put it in a position to grow it when for a number of years it was relatively flat because we were repositioning and retooling the business. So it has to perform and demonstrate that we can achieve growth but we'll also give it some time.

You think of other businesses. You look at our mortgage insurance business when you go back several years. International was the seed we planted starting as a U.S. player and it has certainly grown quite nicely and now we're planting other seeds as we enter additional markets internationally. So we will keep focused to make sure that we can be competitive within any one of our segments. We also won't be afraid to plant a seed for the future if we like the market demographics and like how we can position our business competitively but we will hold each one of those businesses to a high operating standard and judge it over the years and we'll do that here.

Maybe then just following that up, you referenced you had made some fairly substantive investments in technology to support this business line. How long is it going to take it to get to an acceptable level of ROE since I presume it is nowhere close to that today?

Let me put it in even a broader context for you, it may be helpful. We bought a business in this case several years ago that was in need of investment, so we had to redo systems. We redid aspects of product lines. We took out a tremendous amount of costs along the way, and really had to build up the sales force as well. So there were multiple levers that we were driving.

Now, we would have loved to have participated in some of the consolidation that occurred over the past three years in the small group market. However, we were a little busy with the strategic positioning, as GE decided to reallocate capital to other areas. So we had to sit that one out. So we focused on core growth and so now we're back in trying to participate and doing so on two levels; one is core growth and you're seeing the results of that and we're quite pleased with that while we continue to look for opportunities to either pick up blocks of business or consolidate platforms and we think we're an effective -- we think we're an effective consolidator. So this is a business that we look at and say, listen, we're really trying to position this effectively over a three-year period, and we wanted to get the core growth engine started. We have. And we're going to remain active trying to work the other levers and judge the success of that business.

Thank you.

Thank you very much, sir. Ladies and gentlemen your next question comes from the line of Ms. Tamara Kravig of Banc of America securities. Please proceed.

Thank you, just a quick question on the interest rate environment in general and given what you've stated before and at your investor day and the potential for further flattening in the yield curve. Can you just review with us again, the impact on your investment portfolio and across your businesses and specifically if the ten-year stays where it is today, what's the potential impact to earnings to you in '05?

Sure. This is Rick. I will take you back through what we took you through or took some of you through in investor day, which was to say that we are favorably disposed to a rising interest rate environment given our mix of business. We did project over the course of the year that we would get to a 4.90 by year end. Three weeks ago that was looking like what we were tracking; not as much today. But relative to -- that did not occur either relative to those rates we estimated an impact of about $0.01 per share impact to the business if it stayed at the levels we're at today. I tell you, it would still be there. And one of the places you will see it -- you asked about the business lines or what we expect to see from persistency levels in our mortgage business would probably be the one place I'd articulate that. To the overall yield in general, I mentioned that we have a flat yield last couple quarters; we would expect that to blend down over a period of time but the impact to earnings overall would be minimal.

Okay. Great. And the shift on the long-term care can you just give us a sense of what the pipeline does look like for new products you mentioned that and just if you can give us any detail on that at all or any color.

Let me turn that over to George Zippel. George.

I think we talked during last quarter's call that we are actively working on a number of new products focused around the concepts of simplicity and affordability. And I don't want to get out there in front of my competition too early but suffice it to say that in this current quarter, the second quarter you should see us making some enhancements to not only the product features in the long-term care product line but also to some of the service enhancements and frankly, marketing approaches that we take with agents to help hit the needs of affordability with the clients. I would expect that we will have a steady stream in the subsequent quarters to further upgrade the long-term care features and affordability and service platform.

Okay. And are you building any of this pipeline into the modest sales growth forecast that you talked about?

We believe that these new product launches that we have in the pipeline will certainly have an impact on our long-term care sales. The question is at what rate will they take in the market and will they give us a lift? I think the product initiatives that we have, the momentum that we have in our career sales force which has got tremendous traction now under new leadership and some of the work that we're doing to fix some of our independent distribution challenges and fill that pipeline with new distributors will help us get to that modest growth target that Rick and Mike talked about for 2005.

Thank you.

Thank you very much, ma'am. Ladies and gentlemen your next question comes from the line of Mr. Eric Berg of Lehman Brothers.

Two questions, one I wanted to follow-up on the long-term care area. I must confess I am absolutely baffled by what's going on because certainly I think everyone would agree that we have this booming aging population yet we hear that distributors are leaving the business. We hear that it's too expensive yet last year I think you raised prices. You say the product needs to be cheaper yet probably simpler yet you're adding enhancements. Can someone give me a plain English explanation that simply answers the question if this is such a good idea and such a good product why is nothing happening with sales industry wide?

Eric, it is Mike. Let me give you two perspectives, one on the market side and secondly, on the execution side. On the market side I would love to say that we've seen something new besides the three impacts that you've heard us talk about probably over the past three conference calls. Those impacts being the changes that other competitors made to in-force rates, the changes in new product pricing that did vary by competitor; but still they were fairly substantial if you looked at the market overall. And thirdly, the ins and outs of distribution being involved with the product line, some of the outs being where people left the market and some of the outs being on people who are still active in the market but they're trying to assess how and where do I sell this product in view of what's transpired in the past. So to this day those are the three major drivers. I guess a fourth might be you have seen some companies perhaps tighten up their underwriting disciplines; that's something, of course, we have always been very tight on as the leading risk manager in the field.

Here is though how to think about it from an execution standpoint from Genworth given we are and remain the market leader. First, as George alluded to we have two fundamental channels our career sales force and then secondly independent distributors. We're very pleased where we are with the career sales force. We think after the combination of everything from education programs to new products that also provide the ability if someone wants to have effectively a higher deductible called an elimination period they can, though we haven't seen people really run towards that from an affordability standpoint as well as ease of business processing. All of those things are working well and we like where the career force is.

Where we've seen issues is within independent distribution people who either got into the product more recently or had a number of carriers that they represented and have had a variety of experiences; and even within independent distribution we see some number of accounts growing quite nicely. We see two accounts though specifically where they really lost the focus on the product and you've seen negative sales trends and they're trying to rebuild that. It's sort of concentrated is my point Eric. George, do you want to provide any additional color on that on the execution side?

Yes, I will make three additional points. This is George Zippel. First on the market my focus right now, Eric, is kind of on what's happening -- what's happened over the last couple of quarters and what happened this quarter. So it really is a near term view. The market is not really recovering at the rate we would expect. We have indications that when the official market figures come out for this quarter, the market will be down slightly on a year-over-year basis and on a sequential basis so the numbers that we reported while they're flat and we're unhappy with them indicate we may have picked up a little bit of share. And there is still some shocks that are going on through the system right now. There is two of the top ten competitors in the LTC industry are in the process of introducing new products with higher prices and that's taking a little bit longer than everyone anticipated so that's my first point.

My second point is to build on Mike's that distribution, especially on the independent side is mixed while we do have some firms who have kind of taken their eye off the ball we have others who are doing extremely well and are growing high double digits. When you normalize the two, you're seeing kind of flat performance on the independents. Our career guys we talked about at investor day are really hitting the ball out of the park. They have got a new leader. For the first time in several quarters our number of active agents actually increased versus the prior quarter. We've recruited almost twice as many new career agents this quarter than we did in the prior year's quarter and those agents are twice as productive as they were at this time last year. So we feel very good about what that dedicated specialist group is doing.

Here is my follow up question if I may in the -- this is my second and final question. In the retirement area, I think you included maybe for the first time -- very helpful so thanks to Jean, the roll forwards. But what they do show -- or the account reconciliations in the RI&I area. I think it's page 33, but don't hold me to that. In any case what that page from the supplement shows is negative cash flow throughout the business or I believe it is the case in almost every product. Why are you experiencing negative cash flow and when can we anticipate that that will turn around? Thank you.

Let me turn that over to Pam Schutz.

Hi, Eric, it is Pam. Just a couple of things I would want you to look at. One is, if you look across the lines, we are up 10% in assets under management if you look at the Genworth piece and with improving spreads which does drive our earnings. If you look at certain account balances, I would just have you look at a couple of things. One is on the variable annuity side, you're showing the ceded block that's back to GE. When you look at our block, we are growing substantially and AUM across the fee businesses are up 37%. We are rebuilding our variable annuity block. It is young. We are also substantially growing our income series block which is up 17% sequentially, and our third party managed money block. That is the way I would have you look at our account balances and AUM.

Thank you.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Paul Lloyd of Schneider Capital. Please proceed.

Hi. I just wanted to run through on the mortgage insurance side and see if I have -- doing my math right. Claims paid were rounded 40 versus 32?

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

I think your math is correct.

So that would indicate if I am doing it right a reserve release of about 18.

I would not -- Paul, you should not confuse a reserve release with paid claims. You need to remember that we're reserved on a per delinquency basis, so our absolute level of reserves did decrease in the first quarter of this year because our absolute level of delinquencies, reported delinquencies decreased.

Right, but the number works. In other words, if I see claims paid of 30.6 million and that includes expense, versus benefit and change in reserves of whatever it was, 21, the difference amounts to a reserve release. I know it is driven by the delinquencies.

Yes, it does. If you're talking about total losses, that's correct.

Okay. Thank you.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Mr. Steven Schwartz, Raymond James & Associates. Please proceed.

Good morning, everybody. I actually wanted to ask the same questions the gentleman just asked. The fact of the matter is there is -- this is for George obviously. There is $18 million of pretax savings if you will -- or I am sorry, this is for Tom -- if you will, just due to the decline in delinquencies, and if that same decline would not occur again which I don't think that you expect then we can see $18 million in a sense coming back?

Yes, let me step back for a little bit and remind everyone of something. We normally see first quarter improvement in our delinquencies so, on a year-over-year basis or any first quarter all things being held equal, you're normally going to see a reduce in our delinquencies and that will drive again all other things held equal a reduction in level of our reserves if you will. Now, our reserve per delinquency actually increased during the first quarter as a result of the changing mix in our portfolio. What you typically see for the rest of the year, in the second quarter you generally will see an improved in performance of delinquencies, again, based on seasonality. And then you will begin to see those delinquencies again if historical patterns hold true trend up during the third and fourth quarters.

What happened during the first quarter we were projecting about a 5 to 10% -- we were anticipating about a 5 to 10% reduction in our reported delinquencies. They actually as we told you came in at 14%. I would remind you that we are primarily a prime based portfolio and we also saw a sharper decrease in the prime content of our portfolio than we did in the non-prime. That was the contributor to the exceptional performance in first quarter and losses as Mike pointed out.

So maybe of that 18 million that was pointed out maybe it's one-third of that, the difference between -- one-half of that, 5 and 10 versus 14?

I am not -- Paul, I am not sure I understood your follow-up question there.

It is Steven.

I am sorry, Steven.

The difference between the 5 to 10% decrease in delinquencies that you were expecting versus the 14 and then looking at the 18 million of reserve decrease, maybe half of that was due to the exceptional performance in the quarter.

I can't really speculate on that. As Mike indicated in his comments, there is several things that can impact delinquencies. Again, the point I would make is we typically in the industry expect a downturn in the first quarter or a favorable sequential movement in delinquencies because of seasonality. And our understanding of our books and whatnot indicated it should be in the 5 to 10% range.

Steven, if I could add in I think that's what Mike articulated as well is we did expect some of that release as part of our plans but we did see favorability and that's something that we're not, at this point in time, going to include in our full year outlook.

Okay. Fair enough. And then a question back on LTC. There has been some writings in the trade press, people calling for maybe some standard plans set up by the Federal Government, a la Medicare. Would that make sense?

Steven, this is Mike, and let's put the public policy discussion in a broad context. One is, it is very active, no doubt, and we see that as a positive fundamentally. And in fact, really on two levels, both a state and national level. At the state level because of the pressures on Medicaid, you see a lot of governors and others aspiring to be governors focused on the issue. And you're seeing a broad based amounted of support building for what are called state partnerships, where incentives are put in place for people to buy personal long-term care insurance and as a result there is a more advantageous ability to retain assets once they've exhausted that policy before going on Medicaid. And that does require some changes at the federal level as far as law, but you see a strong direction and a lot of hearings are being held in favor of that fundamentally.

You see a national discussion, too, about how to look at that in relation to Social Security, Medicare, and so on as part of is there an adequate safety net for people? And at that level from time to time you hear a question of can it be added on the federal agenda. I have to give you a perspective. I just don't see it. You know the issue as I think all Americans do on what the Social Security dilemma is right now. Medicare is just as big, right behind it, and the idea to me of adding a third behind that would not be something that would be probable in our lifetimes and maybe our children's lifetimes. So I think you will see more focus on public private partnerships at the state level, and perhaps some incentives on the tax side, starter ones that are digestible to get people going. But you will see this focus on different sizes of long-term care, the affordability point George made, and that can help us as well. I just don't see this as a federal new benefit.

No, no. Mike, I wasn't suggesting that the Federal Government would pick up some of the tab. I was talking about the creation of standard policies say in A through J that everybody sold, everybody knew, a la Medicare. Does that make sense?

Well, again, we don't have a federal regulator. There are days we all wish we did. But the reality is we operate in fifty states. We have to comply with the regulations of those states, and those states all have sometimes different objectives, so I don't see that being mandated at a national level, no.

Thank you very much.

Ladies and gentlemen we do have time for one final question and that will come from the line of Mr. Ed Groshans of Fox-Pitt Kelton.

Good afternoon, everyone, or morning still. I was just basically, there's been a lot of talk of MI, and I just really wanted to focus more on the European market more the structural differences there compared to Australia and the U.S., where Australia a lot of it's lender paid, the U.S., a lot of flow. It seems the European market is more of financial structures and I also wanted to know are there key pieces of Europe are you focusing on, are you focusing in like Italy or the UK over other regions?

Tom?

This is Tom. You had a lot there. So let me try to tell you to summarize that with our view of Europe. I do believe and what we do see is that the European is actually more of a flow market than a structured market. In fact that is where we're working very hard to create. The simple strategy behind that is that we do believe that the flow borrower paid market is a terrific product for housing demonstrated by its success and the United States, Canada, and Australia. That is really the strategy that we're pushing globally. When you look at the numbers that we are reporting to you and I think we've indicated that anywhere from 10 to 20% of our total international new insurance resins (ph) this year will be from Europe, it is flow.

And as we've said to you in the past, that we are now underwriting, if you will, writing flow business in six countries. We have a goal this year to add an additional country to that. In Europe the primary markets that we are operating in as you know in the past, are the United Kingdom, Italy, Spain, is three examples of where we are. And we feel very good about the progress. We've indicated to you in the past that it is going to be a long climb if you will, but we started that climb earlier in the decade. We do believe that Basel II, which is currently in the works with the individual country regulators, when it is enacted in 2007 will continue to get -- early 2007 -- will give strong support, capital incentives for the use of the product.

So, I have been asked the question a lot. Our strategy around the world really if I can use a soft word for you is to be full service, so to the extent that there are structured opportunities, bulk opportunities, we clearly will participate in them very consistent with what we do in the United States, Australia, and Canada. But the fundamental strategy is to build a strong flow borrower paid business.

And based on that, it seems from the few competitors that are looking at Europe they're not looking at the flow business as diligently. Are you finding less competition on the ground through the brokers?

I try to always avoid commenting on what they're doing. We're seeing some level of competition all over the world in everything that we do. And if their views are different -- I've shared my views with you. You need to talk to them about theirs.

Thank you very much.

Thank you very much, sir, and thank you ladies and gentlemen, for your participation in the question and answer session today. I would like to turn the call back over to Ms. Jean Peters for any closing remarks that she may have.

Thank you and thank you very much for the robust discussion we have had today. We look forward to talking to you throughout the quarter. Thank you.

Thank you very much, ladies and gentlemen, for participating in Genworth Financial's first quarter 2005 earnings conference call. This concludes our call and at this time you may disconnect. Have a good weekend.