Genworth Financial Inc (GNW) 2005 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Genworth Financial's second-quarter 2005 earnings conference call. My name is Bill, and I will be your coordinator 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 conference call. As a reminder, the conference is being recorded for replay purposes. (OPERATOR INSTRUCTIONS). Also, we ask that you refrain from using cell phones, speakerphones, or headsets during the Q&A portion of today's call.

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

Thank you, and welcome to Genworth Financial's second-quarter earnings conference call. As you know, our press release and financial supplement were both released last evening. They are posted on our website, as are the slides that we will be using this morning.

Our CEO, Mike Fraizer, will discuss operations and strategy in our 2005 outlook, and CFO, Rick McKenney, will take you through segment results. Also on hand for the call are Tom Mann, our Head of Mortgage Insurance; Pam Schutz, Head of Retirement Income and Investment; 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 the world and our business as we see them today. Prior to joining this call, you were asked to read and acknowledge that these elements can change as the world changes, and we ask that you interpret all of 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. Non-GAAP measures have been reconciled to GAAP where required in accordance with SEC rules. A reconciliation is available in the (multiple speakers) slides, as well as in the press release.

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

Thanks, Jean, and good morning, everyone. We just delivered a sound quarter. And looking into the second half of 2005, Genworth is executing well. (multiple speakers) And before read Kenny gets into the financials, I want to offer some views on our environment, lay out our growth engines, provide brief updates on three strategic areas, confirm how we are progressing on ROE expansion, and then update our guidance.

Now, turning to our environment, we feel good about how we are positioned. At the same time, we see some clear challenges. To begin with, the fundamental demographic drivers behind our businesses remain strong. We are seeing the focus on achieving retirement income for life is accelerating across distribution channels and in product development trends. In addition, the income theme is growing in group-qualified segments.

Protection markets are favorable with some differences by product line, while life insurance is a relatively mature market, growing at a modest rate. We are seeing good opportunities to grow through distribution expansion, competitive term life pricing, new product introductions, and continued improvements in service. We retain a positive outlook for the payment protection market, particularly in Continental Europe, where we see an 8 to 10% market growth rate.

The long-term care market remains down on a year-to-date basis but were seeing signs of improvement, and you saw another top 10 competitor announce their exit from the market.

Now, that does not change our positive view on the fundamental demand drivers behind long-term care insurance. And we believe we will see a slow recovery extending into 2006. The small group benefits market remains highly competitive. Here, we are maintaining our pricing discipline while looking for acquisition opportunities to enhance scale.

Let me digress for a moment. In protection, you saw us make some recent organizational moves. George Zippel has been doing an outstanding job leading the segment overall, while also leading the life business. Given the growth opportunities we see, George will now devote all his time to leading the protection segments overall.

Bill Goings moves up from heading payment protection to become President of the Life Business. And Bob Brannock steps up from leading payment protection sales to become president of that business. These moves collectively demonstrate our management depths and commitment to focus resources around growth strategy.

Now, returning to our markets, international homeownership trends are strong, particularly where we focus, linking low down payment mortgages with the use of mortgage insurance. Australia and Europe are expanding. Canada is as well, but the market there is slowing.

Here in the U.S., we are seeing a smaller mortgage insurance market and some concentrated areas of home price appreciation risk. Despite this, Genworth remains well positioned as we penetrate new distribution and maintain strong risk dispersion across regions, lenders and product types, including underweighting of certain risks.

One of the biggest challenges we continue to see is the investment environment, including not just interest rates or yields, but the lack of risk premium. These issues will impact the timing of targeted improvement in our investment portfolio yield, mortgage persistency, and the performance of long-term care. In the investment area, we will be patient and not rush to deploy funds just for yield when we are not being paid for taking the risk. I am pleased to note Mark Griffin, our Chief Risk Officer, is doing a great job as acting CIO, while we conduct an active search for a permanent CIO.

Stepping back, we see a growing focus on capital management by rating agencies and competitors. So capital deployment discipline and effective use of things like securitization remain key.

We also see more parties open to M&A or distribution alliance discussions. Now, you have heard me talk about Genworth as an execution company, and we remain just that. I wanted to outline how you should think of Genworth as a growth company.

Today, we have four business units within our three segments as our primary growth engine. And these include life insurance, European payment protection, retirement income and investments, and international mortgage insurance in Canada and Australia. Now we have three additional business units that are well-established, and we are repositioning for growth. These include our U.S. mortgage insurance business, long-term care and our small group benefits business.

Finally, we have growth opportunities for the future. You can think of these as sound opportunities at various stages of development that encompass both product lines and market extension. These include our MI business in Europe and rest of world expansion agenda, payment protection opportunities beyond Europe, retirement income distribution in the group space in the U.S. and potentially in targeted markets outside the U.S.; long-term care in selective markets outside the U.S.; and combination products that link the benefits of life and long-term care or annuities and long-term care.

We also see opportunities for venture distribution for insurance companies' source products like life or long-term care from Genworth, given our scale and other advantages. With this growth framework in mind, let me update you on three specific areas. In retirement, income and investments, overall assets under management are up 10%. We are seeing steady growth, and sales of our income series products.

In addition, we are building a pipeline of defined contribution planned sponsors from our recent launch of ClearCourse, our group income product. In June, we hosted our first national income symposium for senior representatives of our top annuity distribution relationships. While not a product sales meeting, the most telling result of this symposium was an overwhelming demand that we follow up with the participants on our product solutions. In addition to the Retirement Answer and ClearCourse, we are on track to introduce a GMWB for life product in the second half of 2005.

Traditional fixed annuity sales were robust in the quarter, benefiting from distribution expansion, primarily in our bank channel. Here, we are managing spreads and ROEs carefully. We used our dynamic repricing discipline and capital efficient designs to provide attractive offerings and sound returns.

We have made nice progress in building out our wholesaler network, giving us better reach and channel focus, and we also have a clear line of sight on the runoff of lower return legacy blocks of fixed annuities and GICs. The GICs will roll off as they mature and are being replaced with new funding agreement-backed notes. Now certain tranches of old fixed annuities come out of guarantee and surrender periods over the next 2 years; we expect to be able to reset rates, thereby, increasing profitability as these tranches run off or reset. As a result, spreads are expected to show additional improvement in both retail and institutional legacy lines.

Finally, our institutional lines and structured settlements are facing some sales pressure in the low interest rate and tight credit environment, as we again maintain our spread disciplines. Looking again, we expect to enter a new area with a launch of a registered notes program in the second half of the year.

Now, let's turn to long-term care. We talked last quarter about our five-part strategy to energize growth in this business. We still see fairly flat overall sales, but we thought it would be helpful to provide on update on our progress.

Career agent recruiting efforts are paying off. The addition of new agents in the quarter brings our year-to-date total to 1,300. We are also seeing an increase in new agent productivity.

We are adding relationships and driving activation from independent distributors. In the second quarter, we saw submitted applications increase in several key relationships. As we noted last quarter, two key distributors are in a rebuild mode with long-term care, and we are seeing early signs of a turnaround with them. We are focused on new products and feature updates. We introduced a discount program for targeted small-business segments, have a group product slated for second-half launch, and have initiatives aimed at marketing of products with lower price points, launch of a life and long-term care combination product, and introduction of a return-to-premium rider. All of these promote affordability or enhanced value.

We are also improving service, and in the second quarter, ruled out simplified applications and additional online application capabilities. And despite this progress, we would note that the investment environment for this product line remains challenging.

Now, let's turn to the U.S. mortgage insurance business. Our strategy is going well to rebalance our mix towards distribution segments, which offer higher returns. We term these "growth segments."

In the second quarter, nearly 60% of our flow business was from these segments, which include channels like credit unions and regional banks. This is nice progress towards our goal of achieving 65% of flow sales from our growth segments over the next few years.

Overall, we believe that our share of mortgage insurance flow business has increased from 10.6% in the second quarter of 2004 to over 13% in the second quarter of 2005. This would represent the fourth consecutive quarter of increased share, which we believe fully offsets the impact of lower demand for flow mortgage insurance.

We are seeing nice gains in sales of our new Home Openers product, which is designed to recapture market position from simultaneous second mortgages. We now expect Home Openers sales to total nearly $2 billion for the year. In addition, we remain on track to introduce several additional Home Openers variations in the second half.

As we look at our capital levels in our domestic MI business, we recognize that we have some redundancy in our mandated contingency reserves. First, let me point out that the entire contingency reserve position of some $2.3 billion is not redundant. However, we do estimate that something in the range of 600 to $800 million could be redeployed on an economic basis consistent with maintaining our AA ratings. Any release of these reserves will clearly require a multiyear effort and include discussions and approvals with a range of regulators and rating agencies.

I did want to take a moment and address the issue of the risk of a U.S. housing bubble. Let me remind you that we have not seen a national housing recession in the U.S. for decades. However, we have seen -- and in our view -- will continue to see regional housing declines, which in some cases are associated with regional economic recessions.

Today, strong home price appreciation reflects factors like tight housing supply, low interest rates, a solid economy, and a growth of innovative -- and in some cases -- riskier product offerings, supported by aggressive demand for mortgage-backed securities. We believe this strong appreciation has exposed some regions of the United States to a higher risk of market downturn.

In our view, these higher risk areas now comprise about 20% of the U.S. housing market, with another 15% of the market having more moderate risk. In this context, our MI portfolio is very well-positioned. Our concentrations in high-end moderate risk MSAs are limited to 17% of our portfolio. Our average loan size is $129,000. Only 3% of our portfolio includes loans in excess of $350,000. And our percentages in higher risk products remain at conservative levels.

Now, let's turn to our expected ROE progression. We have five key levers to drive operating ROE growth, which provides flexibility to meet our goals in a number of market environments. We are clearly on track, adding new business layers at attractive ROEs, and carefully managing our mix of new sales to get desired patterns of ROE emergence. At midyear, we are halfway towards running off our full year estimate of $250 million of capital from our low-return block.

On expenses, we estimate we will have taken out more than $180 million of costs entirely next year, with close to 90% of that reinvested in the business for growth and to fund stand-alone public company costs.

Investments are a clear negative in 2005 and potentially in 2006. But we do not expect that to prevent us from achieving a continued 30 to 50 basis points of annual ROE progression, while progressing to our ROE objective of 12% by the end of 2008.

Finally, our capital management and redeployment lever is multifaceted. It has had a clear positive impact, with our March share repurchase and continued leadership in capital-efficient structures. At the same time, we are evaluating other options, including acquisitions, dividend levels and the potential for additional share repurchases.

Stepping back, we have limited sensitivity to interest rates swings in the current environment, which we will cover in just a few minutes.

Now, before I turn it over to Rick, I wanted to wrap up with an update on our outlook for net operating earnings per share growth and operating ROE progression. Based on our results to date and our expectation for the remainder of 2005, we are increasing our guidance outlook to $2.35 to $2.45 operating earnings per share. The expected normal delinquency seasonality in our U.S. mortgage insurance business, new sales and investment pressures in long-term care, and normalized corporate segment performance moderate our second-half outlook. Additionally, we are not projecting any second-half bond calls or prepayments. Landing within this earnings range should deliver our targeted ROE progression.

So I am pleased with the quarter. We are on track to deliver solid earnings growth in 2005, and we will remain well-positioned heading into 2006. And with that, let me turn it over to Rick McKenney. Rick?

Thanks, Mike, and good morning, everyone. Genworth had a solid second quarter that met or exceeded our expectations on a number of fronts and reflects good progress on our strategic initiatives. In my comments, I will be comparing 2005 actual operating earnings with 2004 pro forma operating earnings. I will note that this is the last quarter with pro forma comparisons, as we are 1 year passed our IPO. But you will still see it in our year-to-date comparisons.

And so with that, let me begin with consolidated operating results. Overall, Genworth earned 285 million of net operating earnings in the second quarter compared to 237 million in the prior year. This is $0.60 of operating earnings per share, up 5% coming off a strong second quarter of 2004.

Across the business, the operating fundamentals are in good shape. Margins in the product lines are stable; though, we did experience some mortality fluctuation in our life business this quarter that we believe is within the bands of normal operating patterns. In the asset-based businesses, spreads improved, and we remain focused on prudent capital management. We are seeing nice progress in sales in most key lines, with the exception of long-term care.

Our cost focus remains, as we hold our expenses in lines to self fund on our growth initiatives and public company costs. Originally, we set a goal to drive 150 million of efficiency over a 2-year period. Reinvesting two-thirds with one-third falling through to the bottomline. Currently, we expect to exceed that goal and achieve 180 million over the 2 years, while reinvesting most of that in our growth agenda in areas, such as new products, expanded distribution, and branding. All of this is setting up a good second half.

Let's turn to sales. In several key product lines, we are seeing terrific momentum. Life sales are up 50% in total. So let's break that down into its two components. On the term life set, we were up 48% compared to 2004, and up 17% from the first quarter as a result of pricing that continues to leverage our capital advantage to XXX solution and good distribution reach. We funded an additional $200 million of reserves through the capital markets in the first of 2005. New business returns in this lines are high double digit and sustainable.

The service fees increased volumes. We continued to improve our efficiency with the use of our GENIUS automated underwriting platform and our low-cost operations.

Universal life saw strong growth as well, up 56% from last year and 8% from last quarter. New products launched in 2004, aimed at the fast-growing senior market, drove the sales growth. In the first half of 2005, we expanded the universal life suite to include a survivorship product that has been very well-received by our distribution partners.

Sales and payment protection of 501 million are up 17% from last year after excluding foreign exchange. Since the second quarter of 2004, we have added 24 new clients and established a presence in 2 new countries, Poland and Greece, where we expect premiums to begin flowing this year.

Fixed annuities are up significantly since last year -- 84% to 686 million. Sales in this line have been and will continue to be uneven, as we maintain our discipline under marketplace conditions with our dynamic pricing approach -- allocating capital only when we can achieve our targeted returns.

In the second quarter, we added a key new relationship that alone contributed 100 million in sales. In total, we added 12 new relationships to this product during the quarter, while continuing to expand our wholesaling capabilities.

Our income series product had a solid quarter, up 51% to 95 million. Our efforts to educate distributors and consumers on a need for a layer of guaranteed income with upside potential continues to gain traction.

In our international mortgage insurance business, sales were up 63% over the prior quarter, excluding any impact of foreign exchange. Our flow new insurance written was up 9%, driven by account penetration in Australia but was partially offset by what we see as slowing levels of originations there and in Canada.

Early growth in NIW was due to the selective expansion of our prime bulk product offerings with key customers in Australia and Europe.

There are a few product lines we are repositioning as the marketplace undergoes structural change. First, on the long-term care side, sales in that business were flat with the prior year of 42 million. While we were disappointed that we did not see meaningful sales growth in the quarter, we're confident that our five-part growth strategy is taking root and will generate future sales improvements. A good example this quarter is where we conducted educational road shows with distributors, resulting in a 10% sales increase in those firms.

Turning to U.S. flow of mortgage insurance, we are seeing a number of factors in play. First, we were pleased to see that our flow production was essentially flat in the prior year, as our customer segmentation strategy and Home Openers product introduction drove increased market share. This increased share offset an estimated 20% decline in the demand for flow mortgage insurance in the second quarter versus last year.

We gained solid traction with our Home Openers suite of products, producing $500 million in new insurance written during the second quarter. These products are focused on recapturing some of the market lost to simultaneous second mortgages.

On the opportunistic front and challenges list, traditional variable annuities remain a declining line for us. Sales are down 26% from last year, as we do not offer certain guarantees, such as traditional minimum accumulation and income benefits that currently represent 43% of the flows.

Spread institutional sales are uneven, down 16% from last year. We are seeing the mix shift from older, lower margin fixed rate contracts to higher margin funding agreements. Both structured settlements and intermediate annuities are down, as the low-interest rate environment pressures sales in both of these products.

In summary, we have made clear progress in many key products, as we execute on our growth strategies and repositioning.

Let's go to the earnings results for the segments. Starting with protection, the fundamentals of this segment are good, but there are a few notable items in the quarter that dampen growth. In the life business, growth was more than offset by $9 million of mortality impact. In the second quarter of 2004, we experienced $6 million of favorable mortality. in the current quarter, we experienced $3 million of unfavorable mortality. Also, in the life business, we had an $8 million one-time deferred gain correction on a reinsurance contract. Backing out both of these items, underlying life results demonstrated double-digit growth, more in line with the run rate of the business unit.

Long-term care was up 7% in the quarter, primarily driven by experience gains on reinsured blocks. Absent this gain, earnings were flat as growth of the enforced block was offset by pressure from lower terminations and a prior period favorable DAC adjustment.

There were also two current period adjustments that netted $4 million of benefit. The first adjustment was for $14 million related to an incorrectly coded policy rider that was treated as a full policy, and consequently, was overreserved. You'll see this adjustment impact in several lines in the P&L, including premiums, reserves, and DAC amortization.

Second, we made a $10 million of adjustments to claim reserves, primarily achievable to requirements of our estimates for how long certain policyholders will remain on claim. Given sales levels, termination measure in a challenging investment environment, long-term care is expected to be flat for the total year with 2004. Lastly, payment protection is running strong in 2005, up 28% in the second quarter to 23 million.

So stepping back in the details, the protection segment is performing well. Excluding the impacts of mortality fluctuations in the life business and the reinsurance correction, this segment was in line with what we expect to be a second-half quarterly run rate of 140 to 150 million.

Moving to the retirement income and investment segment. Our RI&I delivered impressive results during the quarter. Earnings were up nearly 40% to 60 million. In a spread-based retail business, assets under management grew 8% on the line, and spreads continued to improve across the products.

Also contributing to a favorable result was $7 million in tax benefits, of which half is a catch-up, and about half will be sustained through more efficient structures in asset classes.

Fee retail is performing well. Assets under management in this line are up 40%, driving higher fee income, along with a $3 million benefit from taxes, of which 2 million will continue. This was partially offset by higher expenses from investment in growth platforms and lower deferred costs.

Spread institutional is up 1 million, with both period benefiting from certain investment items. In 2004, the line had a $3 million of bond calls and prepayments, and in the current quarter, has experienced favorability on some fixed to floating rate swaps. Assets under management are 9.2 billion, and we continue to make good strides at shifting the mix away from our lower spread contracts. In terms of the second half, we expect this segment will run at about 45 to $55 million per quarter.

Our mortgage insurance segment earnings in the second quarter were up 6% to 121 million, with strong international earnings growth offsetting a modest decline in the U.S. business. International earnings were 60 million, up 10% excluding FX. Our international results were driven by $9 million of growth from the aging of our insurance and force block and our strong new insurance written. Included in this growth is approximately $4 million of after-tax new program spends for investment in our global platforms, such as systems, people and infrastructure. The unearned premium reserve pipeline now stands at 1.6 billion, representing future revenues over the next 10 years.

Our international loss ratio of 13% reflects a favorable global loss environment, but losses were up $4 million from the prior year, reflecting the normal seasoning of our book.

Turning to the U.S., earnings were 61 million, down slightly from last year. Overall insurance in force is down 12 billion compared to second quarter of 2004. We also had $3 million of favorable loss reserve impacts in the prior year that were mostly offset by current expense efficiencies.

Looking to the second half, we think that persistency will improve to the mid to high 60's, and we see insurance in force stabilizing and returning to growth in 2006. So for the total segment, we expect normal U.S. mortgage delinquency seasonality will lower the earnings outlook compared to the first half for the segment running in the 105 to $120 million range per quarter.

The corporate and other segment was on our run rate expectation this quarter, coming in at a $28 million loss, down 19 million year-over-year. The majority of the decline was investment income, where we saw favorability last year. The prior period had a higher partnership income and unallocated surplus income, while the current period reflects an impact of $3 million lower earnings from our $500 million share repurchase. Additionally, during the quarter, we reviewed the first-year activities related to our service agreements with GE and booked a $5 million adjustment to operating earnings to reflect the actual time performed on these services.

Let me take a minute and remind everyone of the components of the corporate and other segment. Our non-core operations are primarily our Bermuda-based subsidiary and income from consolidated securitization entities. Combined, they contribute about 6 to $8 million per quarter of operating earnings, which will decline over the next few years. It also includes a surplus investment portfolio. This is the portfolio in excess of the 300% risk-based capital level that we fund our life product lines to. And it generates about 12 million to $17 million of positive operating earnings.

Next is the debt of Genworth that has a quarterly cost of about $27 million, with the only variation coming from our $500 million of commercial paper. And lastly, we have some expenses that are not allocated to the business line, such as branding and certain stock option agreements. The combined effect of the quarterly run rate of 25 million to $30 million loss, and we expect this to remain relatively stable over the next several quarters.

The investment portfolio yield at 5.4% is performing well, but it is being lifted by a few items. First, we have seen 12 basis points of lift from bond calls, prepayments, limited partnership income and other one-time investment items. Second, we are getting an additional lift of 18 basis points from our floating rate assets, as the short end of the yield curve has come up. This floating rate benefit is completely offset by matched floating rate interest credited to our contract holders. Adjusting for these two items puts the core yield at 5.1%, right in line with our original expectations for the year.

Coming into the year, we expected the 10-year treasury to rise to the 4.9% level, averaging about 4.5% for the year. Given the current yield curve, we now expect the 10-year treasury will end the year at about 4.3%. We will see some slight pressure on earnings, mostly from lower mortgage persistency, where our sensitivity to rates in the short-term is concentrated. The impact of this is about $0.01 per share.

Our overall view of interest rates for Genworth remains the same. Plus or minus 50 basis points is $0.01 of operating earnings per share.

Turning to our capital, we began the year expecting to be at the 1.5 to $2 billion of readily deployable capital capacity by the end of the year. This was comprised of existing cash to the holding company, debt capacity, and operating Company surplus. With a $500 million share repurchase along with our estimates for statutory earnings and debt capacity changes, we expect to end the year at approximately 1.5 billion of excess capital capacity. This does not include any excess contingency reserve capital in our mortgage segment.

Turning to our outlook, Genworth earned $1.26 per share of operating income in the first half. When thinking about the second half run rate and the outlook for the full year, there are a few factors to consider. As we have articulated in the past, we typically realized the impact of higher delinquencies or seasonality in our U.S. mortgage insurance business. This impact will reduce the second-half earnings by $0.04 to $0.08 per share. Further, we are assuming no additional calls or prepayments that added $0.03 per share in the first half.

Next, corporate expenses in the first half were favorable to their run rate, mostly from timing, and you will see that come back in the second half. And on long-term care, considering first-half extraordinaries, we see about $0.01 of earnings pressure in the second half. Finally, with regard to foreign exchange, we also see about $0.01 per share of less favorability in the second half when we take spot rates through the end of the year.

So summing it all up and taking into account normal fluctuations across the segments, puts us in a range of $1.09 to $1.19 of expected operating earnings per share in the second half. And for the full year, we are increasing our outlook, as Mike mentioned, to $2.35 to $2.45 of operating earnings per share.

And with that, I will turn it back to Jean to start the question-and-answer.

Thanks, Rick. Operator, we are ready to go to the question-and-answer session. We started a bit late this morning because of the prior calls from other reporting companies. So rest assured, we will allow ample time to get to your questions. Go ahead, Operator. We can start to queue.

(OPERATOR INSTRUCTIONS). Ed Spehar, Merrill Lynch.

Just two quick questions, I guess. First, Rick, I was wondering if you could go what you were talking about again on the investment yield in the core -- I think you referred to it as the core yield -- and what you think your new money rates are currently?

And then, the second question is on long-term care sales outlook. I think most of us have heard MetLife refer to some changes in their product portfolio that they are in the midst of rolling out. And I know they haven't rolled it out in some important states yet. Given their market share, which you know, they have come up from a very small player, I think to about 20% of the market in a relatively short period of time. I am wondering what kind of opportunities there could be.

And maybe you could answer it in a general way perhaps. When other companies are doing similar things in terms of pricing and product designs, and perhaps what you did a year or so ago -- what kind of opportunities do you think there could be to gain some market share? Is that at all factored into your outlook for LTC sales going forward?

Let me first -- Rick, you want to start it off (multiple speakers) and then we will (multiple speakers) --

Yes, let me just take a -- on the core yield -- what we are trying to lay out on the core yield is the core operating performance of the portfolio. The 5.4% that we report does include some lift from bond calls, prepays, et cetera. And then also this year, just to give you a good year-over-year comparison on the trend line, we also highlighted that our floating rate asset has lifted that. It is real yield; it is really part of our core yield. But we were trying to get comparability there. Likewise, I would say on a comparable basis, we are at about 5.1%, which is what we expected year to year.

In terms of new money rates, we actually do not give those out in terms of what we are seeing across the portfolio. So there is a lot of variants across the different product lines anyway, so I will leave it at that.

I would step back and think about it this way. Basically, the 5.0, 5.1 that we showed at Investor Day, we are tracking right to that. We just wanted to give you a little more visibility on it, given the factors that Rick mentions. So we will come in as we lay it out to you back in end of December.

Just let me turn to long-term care for a moment. I will hand it off to George in a minute for some perspective. Clearly, we think it takes several things to drive growth at any point in time. Hence, the five-part strategy -- everything from the products to the distribution expansion to driving our career agents that we have laid out.

And what we have experienced in the past is anytime a company goes through shifting prices, you see some market impact. So we think we are well positioned on that front. It is tough to forecast how that will play out competitively in any one state at a point in time. But as far as where our strategy is, all of our pricing rolled out going back into last year. And this influx of new products and the distribution progress we are seeing, we feel good about where we stand. Anymore color on that, George?

Yes, Mike. What I would add is -- it is not just Met that is out there in the marketplace today introducing new products with higher prices. There are three other major carriers that are doing the same thing. So that is creating a bit of turmoil in the industry. And our view is that the industry, while it probably did have a better -- slightly better second quarter -- it's down on a year-to-date basis. And if you look at our stability in our sales performance, that means we are picking up some share. And we plan to continue to do that based on all the growth investments. But the real wild card for the balance of the year is what is going to happen to the overall market.

Okay, and just one point to clarify here. Rick, when you are talking about the 5.4 versus the 5.1, I am assuming that the biggest difference between those two numbers is the higher return you are getting on floating rate assets, which I think you said was completely offset by the other side of the balance sheet. Did I hear that correctly?

That is exactly correct. About 18 basis points.

Tamara Kravec, Banc of America Securities.

Thank you; good morning. A couple of questions -- the first is -- and you can correct me if I am wrong -- but you are going along the way of introducing guaranteed variable products. And that seems to be a little bit different from what you have started out doing. And with the for life product and others, I am interested in your comments on the opportunities in that market, given how competitive it is.

And then secondly, in terms of excess capital and acquisitions, where -- I know it is impossible to really comment on the pipeline. But if you could maybe take the question instead and comment on where you think you may lack scale, or what businesses do you think could benefit from that kind of acquisition-related growth? That would be helpful.

Before I hand it off with Pam, there is no change in strategy here. Let me be very, very clear on that. We have an income strategy, which we are complementing with other wealth accumulation products. But Pam, why don't you add some color to that?

With respect to your question on traditional variable annuities, you are correct. We have not participated in certain guarantees like the IB and the AB. I want to remind you that we do have a broad product suite and broad distribution. Our focus has been in our income series or income for life, which sales increased 51% from the prior year and 10% sequentially. We will introduce a -- on track -- we are introducing a GMWB for life. We believe that product just strategically fits well with our income series sweep. So we feel good about that.

We have also added wholesalers, as we have talked about. And we plan to continue to add more as we sharpen our focus on our channels. And as Mike mentioned, we continue to lead the way on education about the value of income for life.

Just on your second question about excess capital and acquisitions -- first, let's put it in a context. The reason we are seeing more people willing to have dialogue are because -- one, people are facing the pressures of higher compliance costs; number two is core growth can be challenging for some companies. You have to invest a lot in products in distribution and technology and so on. And then third, I think there are more honest evaluations of where people feel they are a real good manufacturer versus where perhaps they should be a distributor and source the product elsewhere or really hold the platform in.

If you go back by our priorities, we've looked at consolidating acquisitions in both the life and the retirement income areas. We have looked at blocks of business across almost every line, maybe with the exception of long-term care as far as consolidating blocks of business. Third, we have looked at distribution plays, where we could -- typically, income-based financial planners, such as accounting networks we have done in the past, and we are looking at others. And fourth -- or some niche asset managers usually that are doing managed money -- have something that distinguishes them, not just the standard mutual fund complex.

There is one area I pointed out, where we were clearly like to get some more scale is in the small group business, and we are actively looking there.

Joan Zief, Goldman Sachs.

This is Randy Simpson (ph) actually. Rick, I had a question for you. I wanted to get your thoughts on perpetual preferreds, and specifically, how you targeted 1.5 billion of excess capital would change if you consider that instrument.

And then secondly, really, what are your thoughts post GE dropping below 50% of using professional preferreds to buy back additional stock above and beyond what you might otherwise do without it?

Let me start and pull back a little bit to your question around there because capital -- that excess capital we have denoted, the 1.5, does not include any of those structures. There has been a lot of discussion in the marketplace around that particular structure, and there are some things that we continue to look at on that front. But I wouldn't want to highlight any particular part of our capital structure and where we might go on that front -- and certainly wouldn't want to talk about anything that may happen before or after we go through a process with GE. We look at our capital structure standalone, and we will manage it that way.

Nigel Dally, Morgan Stanley.

This 6 to 800 million of redundant mortgage insurance reserves you mentioned -- I know it's a complex process, but can you run through the necessary steps to extract that capital -- how many steps you've currently taken, and what sort of timeframe we are looking at to finish that procedure?

Nigel, let me turn that over to Tom Mann.

As Mike indicated, in his comments, it is a rather complex process. But what we do is work with both the rating agencies and also our insurance regulators as well. As Mike had mentioned in his comments, most of the -- if you will -- excess trapped capital is related to our contingency reserves. And the process of releasing those has to be done on a timely basis. So that is what we continue to try to do. We work with the rating agencies and our state insurance regulators to work that down.

But in addition to that, we have to do it consistent with our overall needs of Genworth. And Rick, you might want to comment on that side of it as well.

The only thing I would add to what Tom was saying is -- you are asking which step in the processes you go through? We go through multiple fronts to evaluate that. These contingency reserves will be released by regulation. It is a question of -- at what point do you want to tap into them? You saw us release 700 million last year, which were clearly, clearly redundant over that. But as Mike articulated, the 6 to 800, then you get to a level of bringing it to economic reserves, which is a much different process, is really what I would add to that.

Okay, great. The second question is just on term life. We have now began to see some other companies introduce capital market solutions for their XXX reserve requirements. Are you concerned that this will be eroding some of your advantage in that market and later increase price competition?

The term market out there, it continues to be a very competitive one. We are seeing fewer competitors out there, who are strong players due to the challenges in the reinsurance market and the overall impact of XXX. Some people can mitigate that impact, and some companies cannot. Our capital market solutions does give us an advantage. And we intend to continue to be a very strong competitor there on the product front.

But product is not the only lever that we pull. We are working pretty hard to drive core growth by expanding distribution into financial institutions, into IMOs. We are actually adding more traditional distributors, the brokerage general agents. We have added almost 30 new BGAs this year that is fueling some growth. And then we just continue to provide great service, whether it is our GENIUS underwriting system or providing consumers with the ability to make their initial premium be a credit card. All of those things add up to what we think is going to be a continued, strong term life growth story of quarters to come.

Eric Berg, Lehman Brothers.

My questions relate to the international mortgage insurance area. While I do not have your statistics supplement in front of me, I think it is the case that there was not all that much growth in risk in force -- hardly any -- in the June quarter from the March quarter, sequentially that is. And I would have thought that given all the new business you are writing, it would grow.

Relatedly, the revenue growth sequentially -- or if you look at the trend in the premium growth, it seems to be slowing. What is going on with those two measures?

Let me just highlight first the insurance in force. I think you mentioned risk in force, but it would be the same explanation across the risk in force as well. There are two items that took the NIW increase offsetting that. The biggest of which is FX, which had an $8 million impact in our $200 million -- 210 roughly -- insurance in force based. And secondly, there was a $6 billion adjustment relative to two small items, really more in statistical adjustments, not anything that flowed through our P&L. So if you look at the two of those, it was up 7% sequentially quarter over quarter. And I will turn it back to Tom.

Let me deal with your second question on -- I believe it was that if you look at the level of net written premiums that that growth is not, if you will, keeping up with that on the new insurance written. A couple of reasons for that -- you need to make sure that you are breaking out your new insurance written between flow and bulk. And as you see sequentially in the second quarter, we had a nice performance in the bulk business. But again, that is generally going to be below 80% loan-to-value business, which commands a much lower price -- lower risk and lower price.

In addition to that, in Australia, while our enew (ph) reinsurance written continues to be on a flow basis quite strong, we are seeing an increased percentage of that business again with below 80% loan-to-value business, which again commands a lower premium.

And lastly, as we grow in Europe, our death of coverage there is not as strong, not as deep, if you will, as it is in Australia and Canada. So again, you are going to see lower comparative levels of net written premium.

Tom, if I could just follow up with a question. I want to ask the same question about your domestic mortgage insurance business that I asked last quarter, which is -- I certainly hear about all the initiatives -- the success with Home Openers, the success in pursuing other distribution channels. But at the end of the day, if we're trying to understand whether it is two step forwards and one step back, or one step forward and two step back -- in short, if we are trying to get a sense whether all these initiatives -- admittedly successful -- are in the end really paying off. Do I really need to look beyond the risk in force, insurance in force, and loans on the books? I mean, doesn't that tell me, sort of give me a score of how you are doing?

Let me try to answer that for you Eric. And I will even choose -- I will start with one word, and I am going to call it "persistency." And then let me build on that.

As Mike indicated, in the halls of Raleigh, North Carolina, we were very, very pleased with our performance in the second quarter. Simply because our flow -- our level of flow production was flat year over year. And that despite the fact that we have what we are estimating, about a 20% smaller market size. Mike has mentioned the segmentation that we do, and the products that we are flooding into those particular segments, the Home Openers is actually above our expectations. All that permitted us to grow our market penetration now in the second quarter equal to, if you will, the decreased market size, which is very, very positive for us.

As I look to the future, I also see -- it clearly a stabilization and possibly an improving environment for market growth. And that is driven almost entirely by the flatter yield curve. It is going to make our Home Openers products and our traditional mortgage insurance products much more competitive against the 80/10/10 product. It is also, we are seeing early signs that it is going to drive more fixed-rate product in the market, which will increase GSE penetration. And that is therefore, as I look forward, I see not only share growth building nicely -- four consecutive quarters that Mike spoke to. I see the opportunity for us to begin to increase our purchase penetration in the market for the reasons I laid out. And I also see improving persistency.

It clearly was not at the levels that we wanted it this year. But as we would look towards the second half of the year in 2006, we do and are hopeful for modest improvement in that persistency, as we have a reasonable increase in interest rates, not a whole lot but to a degree. And also, we are going to see what we believe to be lower rate term refinancing, which has impacted our persistency as well. In other words, you will see more fixed and less fixed moving to ARMs.

Therefore, while we are not happy with the fact that we didn't get the insurance in force growth this year -- and that is really the driver of all those metrics you laid out there -- but it is really a persistency issue. Our market execution is going very, very well. And if we can now get the persistency to move back up, I think we are going to turn this thing back into an insurance in force growth business. That is what the reposition is all about.

That's very comprehensive. Thank you, Tom.

Tom Gallagher, Credit Suisse First Boston.

Another question for Tom on the international business. Given the slowdown in the origination mortgage markets in Australia and Canada, do you expect a growth deceleration? Do you see that continuing to kind of slide down a bit? And should we expect to see more bulk transactions? And then also, just as a follow-up to that, can you just give us an idea, a comparison in terms of how the margins look on bulk versus the flow business?

Three questions there, and let me try to start with your middle one first on bulk. We will not use bulk to -- we do not use bulk to offset any upsides or downsides in the flow production. We do prime-based bulk business internationally really based on customer needs. So you are going to continue -- and we are pleased to do it and happy to do it -- so you will hear probably -- you will continue to see further choppy delivery of the bulk business on an international basis.

Let me hit your third question. It is really tough to give a margin comparison because our actual pricing on our product varies by country. So I would really rather not do that. But again, because the majority of our bulk business again is below 80% loan to value and is prime based, you are really not going to get large margin swings as a result of our bulk presence.

Your first question was related to growth. We have now gone through really 2 -- in 18 months, probably we will have 2 years of relatively slow -- excuse me, flat mortgage origination growth now in both Canada and Australia. I've said to you before we are very pleased about that because it is certain tendering to tap down the levels of appreciation. I actually -- Tom, when I look at 2006/2007, probably see that growing, if you will, because we have had the 2 years of downturn.

And I don't -- therefore, as I look to the future directionally, I see us returning more to a growth path there. We are very pleased with the 10% growth that we have had. But we have received that through segmentation, product execution in those market. So I would potentially see us getting some lift from that in our established markets.

Additionally, we are doing nicely in Europe. We are probably up over 20% year-over-year with the European growth. It is now probably 10 to 15% of our total sales production. And as we have said to you in the past, we are working very, very hard to bring new countries on board -- Mexico, Japan, more countries in Western Europe and also Eastern Europe.

So again, directionally, as you look towards out beyond 2005, I still see us having very, very nice growth here through distribution and product expansion.

And Tom, just a follow-up is -- would you say most of that outlook in your two largest markets -- is that driven by your expectation that, even if the market remains flat, that you will be able to continue to penetrate further?

Well, again, I really do not want to get into 2006 too heavily here. I would just say that in the past that as we have had -- we have always had account penetration, and I don't intend to deliberately stop that. We are going to -- we are doing very nicely in those markets. And as a matter of fact, during the second quarter, you may have seen a reasonable increase in our expense levels internationally. That was driven almost entirely by continued upfront investment in our international platforms, of which Australia and Canada are two.

And so I hope you are going to see -- continue the penetration, and I also hope that you -- we will see get some market lift as well.

Got it. And just one last question on an unrelated topic. Related to the long-term care reserve increase that you took, I do not want to blow this out of proportion because the number was not large. But can you just comment on the level of reserve adequacy, whether you are confident or not -- whether you have done any comprehensive reviews on the entire book of business as of late, or whether you plan to do that?

Let me just give you a perspective. Perspective one is clearly, we are the biggest player with the biggest in force. I think our in-force block is about 40% bigger than the next player in the market. As a result of that, we do have extensive amounts of data, and we use that data to refine on an ongoing basis all of our assumptions, any reserving areas and that. And we continue to see that as a strength.

One thing that we do do periodically is we have outside parties look at how we underwrite, how we reserve, how we do lots of things in the business. We do this across all businesses, not just long-term care to always gain outside perspectives. And that has always been a great way to find both best practices and check your own approaches, and we will continue that from time to time.

But there is nothing based on what we have seen in the adjustments we have made that you should take any alarm to per se. But you will see us on an ongoing basis make adjustments up and maybe make adjustments down, as we hone those reserves using our extensive data.

Geoffrey Dunn, Keefe, Bruyette & Woods.

I want to circle back to your comments about the excess capital in the MI business. I think when you extracted the original 700 million, you borrowed against the contingency reserves rolling off in '04 through '06. So do you think that the departments of insurance or rating agencies would allow additional capital extraction, borrowing out past that timeframe? Or do we have to wait a couple years before maybe you can actually get that capital taken out?

That is actually just one element that I would look at. It is really the expired risk. So when they looked at that, it was extracting -- you are right -- out of the '04/'05 blocks. But it was risk that had expired. So that is essentially one factor that they would look at over the evaluation of it is to how you would go through that process, and we take that into account. But I would not say that is a -- potentially a roadblock per se. It is just something we have to evaluate as we go forward.

Okay, so the rating -- the DOI and the rating agencies are becoming maybe more flexible in acknowledging that a lot of the old books have already turned off -- over and turned out of your portfolio, but the reserves are still there?

They certainly did for the first 700 that we released, and it is an ongoing conversation we have.

Okay, and then, could you provide a little color on the bulk business done internationally? What type of bulk deals were you doing overseas?

I will turn that over to Tom.

Geoff, as I indicated to you earlier, we operate in the bulk market internationally on a selective and really an opportunistic basis. And generally speaking, what you are going to see in both Canada and Australia is us providing bulk business on below 80% loan to value of business. It is done when commercial banks or mortgage managers want to enter the securitization markets. And therefore, they need some credit enhancement on their below 80 product. As you may recall, they already have it on their above 80% product. So that is what that is.

We also had a transaction in Europe. That was a one-time transaction in the United Kingdom, and it was on above 80% loan to value of business. But again, you're going to see this flow through the new insurance written line more on an opportunistic basis. The majority of our efforts we've discussed in the past on our entire United States and global operations are all on the flow side.

Okay, and are these mostly cash execution transactions? Or are you moving more into the synthetic executions?

I know what you mean by synthetic; I am not sure what you mean by cash. But these are -- we charge an upfront premium; it is a cash deal.

Well, I mean, in terms of the underlying risk, is it a synthetic transfer of risk?

No, no, no, no. This is standard mortgage insurance coverage that we have a loan insurer -- should that 80% loan go in default status, we would work with our servicer. And we would be providing the first loss level of protection.

Mark Finkelstein, Cochran, Caronia Securities.

A couple of quick questions here. Not your biggest line but growth accelerated in payment protection, which is one of your highest margin products -- I think the growth is actually above your beginning of the year target. Can you just add a little bit of color on that? And are you seeing any additional margin pressure and/or more competition in Europe in that product firstly?

I will take that one. I think the payment protection sales quarter was an extremely strong one. And I think it reflects the success that that team is having in the marketplace. In the past several quarters, they have added some very important clients. And in this past quarter, they were actually able to activate accounts within those clients that added some sales lift.

The other big driver this quarter is that they have worked with their existing clients to work on penetrating the accounts further. So you put those two things together, and it adds up to the dynamic sales quarter that we had. And we expect that that is going to continue.

Now, Europe is a very competitive place. We are seeing our traditional competitors continue to be strong. We have seen a few nontraditional competitors on certain transactions in certain countries. But we do have the distinct advantage of being the leading pan-European provider of payment protection insurance. And as we work with clients -- banks in particular -- that are growing more pan-European themselves, we have that as an advantage. We continue to be bullish on the payment protection growth story.

Okay, just on margins, are you seeing any pressure?

The margins continue to be -- it is a transaction-oriented business, so we can be selective on which transactions we take and which transactions we pass on. And overall, the margins are holding up very nicely.

Okay. And then just a quick question for Rick -- tax rate in the RI&I segment in the 24% range -- what drove that, and how much of that is sustainable, please?

There is actually about half of that is sustainable. In terms of the total, the $10 million of benefit in the quarter, about half of that will sustain. But we don't manage our tax rate at the individual segment level. What you saw was actually an audit finalization that was done, and that is the final resolution of that. I think if you step back and look to overall Genworth tax rate, we will be looking to be on our targets that we established for the year. So don't isolate that one too much.

That concludes our Q&A session for today. I would like to turn the call back over to Ms. Jean Peters for any closing remarks.

Thank you, Operator. Thank you, everyone, for joining the call. We look forward to talking to you as the quarter progresses. Thank you.

Thank you very much, ma'am. Ladies and gentlemen, this concludes Genworth Financial's second-quarter 2005 earnings call. Thank you for your participation. At this time, the call will conclude, and you may now disconnect. Have a good day.