Genworth Financial Inc (GNW) 2005 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Genworth Financial's third-quarter 2005 earnings conference call. My name is Bill and I will be your conference coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference call.

As a reminder, this conference is being recorded for replay purposes. Also we ask that you refrain from using cell phones, speaker phones, or headsets for the duration 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.

Thank you, operator. Welcome, everyone, to Genworth's third-quarter earnings conference call. As you know, our press release and financial supplement were released last night. They are posted on the Website. Please note that this quarter, there is no slide presentation being used as part of the earnings conference call, for those of you who are signed on to the Web.

Our CEO, Mike Fraizer, will discuss highlights of operations, and our CFO, Rick McKenney, will take you through earnings, the 2005 outlook and update on capital management. Also with us for the call are Tom Mann, President and CEO of Mortgage Insurance; Pam Schutz, President and CEO of Retirement Income and Investments; 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 businesses as we view them in their current operating environment. As you know, these elements can change.

Prior to joining this call, you are asked to read and acknowledge that these elements can change, and we ask that you interpret all of our comments in that light. Today's presentation also includes non-GAAP financial measures that we believe are meaningful to investors. In our earnings release, non-GAAP measures have been reconciled to GAAP where required in accordance with SEC rules.

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

Thanks, Jean, and good morning, everyone. Genworth delivered a strong quarter, with net operating earnings per share of $0.65, up more than 18% in the quarter. Looking toward 2006, we are executing well on many fronts, delivering good sales and solid earnings growth.

Before Rick McKenney gets into the financials, I want to update you on several key activities of the quarter. First, as you know, we completed a very successful secondary offering by GE of Genworth shares in late September, dropping GE's ownership from 52% down to 27%. We put two management teams on the road and had great dialogue with many key accounts who became new investors, as well as with a number of you that have been with us since the IPO. We were very pleased to broaden our shareholder base and see trading liquidity increase. Average daily trading volume is up from about 1.5 million shares to 2.5 million shares since the secondary was priced.

With the sell-down by GE, we saw several changes. First, the composition of our Board of Directors will change. Between now and our annual shareowners' meeting next May, we will move to a majority independent board and the total number of board members will increase from 9 to 11. We have been working hard to identify and excellent roster of new board candidates. You will see us add to our Board of Directors in stages, as GE's ownership continues to decrease over time and GE gives up a corresponding number of board seats. Importantly, with GE as a minority shareholder, we are now in a position potentially to implement an ongoing share repurchase program, subject of course to Board review and approval.

From an operations perspective, GE's sell-down triggered Genworth's physical separation from various GE systems -- payroll, e-mail, employee benefits, and so one. Thanks to great execution by our teams across Genworth, this transition was seamless, with no material impact on Company operations.

We made progress on the brand front in the quarter, launching our newest commercial in a series of ads which have included Andre Agassi and Steffi Graf. We have also been piloting regional ads aimed at getting people to consider long-term care insurance. Today, distribution partners, consumers, and investors give us quite positive feedback on our brand initiatives, so I am pleased with the momentum building here.

Also in the quarter we announced the appointment of Mark Griffin as Genworth's new Chief Investment Officer. Mark has a very broad experience in the actuarial, financial, asset liability risk, and investment disciplines that are so critical to optimizing returns in today's investment environment. Previously, as Genworth's Chief Risk Officer, Mark was instrumental in developing asset and liability strategies, including modeling of interest rate scenarios, liability cash flows, and asset portfolios.

Mark has held the Chief Investment Officer role on an interim basis since July, and has already begun to grow and solidify the team. Mark will remain on Genworth's Risk Committee, along with myself and others. We have an active search for new Chief Risk Officer, and in the meantime, Leslie Dietch (ph), our Risk Management Vice President, will be acting head of Risk Management.

Stepping back, we are pleased with our results this quarter, and I would like to talk about how they played out in line with our strategic framework. As many of you heard during our recent investor meetings, you can think about Genworth as both an execution company and a growth company. Let's start by talking about the four biggest growth engines among our businesses.

Two of these growth engines are U.S.-based and two are international. All four showed strong results in the quarter. In the U.S., our life business and retirement income are both showing clear growth. Term life sales increased 46% from the prior year and 12% sequentially. Our capital efficiency enabled us to price competitively and this, coupled with distribution expansion and service initiatives, have led to the sequential and year-over-year sales improvements.

Earlier this week we launched a new term product called VantagePoint, a strong entry into the fast-growing return of premium term life market. Looking more closely at life distribution, we have broadened our reach and we are on track to add 50 brokerage general agents by year-end. We have added two key insurance marketing organizations this year as well.

We're also making good progressing in universal life. Our UL product suite is filling out nicely and driving sales growth. For example, the survivorship life product we introduced earlier in the year had a meaningful impact on sales this quarter and we will make additional product enhancements by year-end.

Our second domestic growth franchise, Retirement Income and Investment, is also progressing well, with our sharp focus on income distribution. Sales of income series products are up 41% in the quarter (technical difficulty) a new guaranteed income for life withdrawal benefit, available on select variable annuities. Lifetime Income Plus provides a powerful complement to our income distribution series. Here, we're targeting clients near or in retirement who are looking for income as well as optional liquidity.

Total retirement income and investment assets under management are up 13%, driven by nearly 50% growth in our fee retail business. On that front, we were pleased this week to close the acquisition of an adviser network with about 500 accountants and financial professionals for Genworth Financial Advisers, bringing the total to 2400 planners. Genworth Financial Advisers focuses on income sales as part of developing a financial plan for clients, a great fit with our income distribution strategy.

Now let's turn to our two international (ph) (technical difficulty) businesses. In Europe, payment protection sales increased 14% through added penetration with lenders and new relationships. This quarter, we launched in the Czech Republic and Hungary as part of our expansion efforts.

In mortgage insurance, international new insurance written grew 50%, excluding foreign exchange. We continue to penetrate customers, with particular progress in Australia. Combined, these four growth engines generated about two-thirds of our net operating earnings in the quarter, and the outlook for 2006 is solid.

We have three businesses that we are working to rebuild into the growth engines they once were, and here, we saw progress in the two largest business units during the quarter. In U.S. Mortgage Insurance, we saw our first quarter of new insurance written growth in more than a year. We estimate that our share of mortgage insurance flow business has increased from 10.8% in third quarter of 2004 to about 14% in the third quarter of 2005. This would represent the fifth consecutive quarter of increased share, which we believe more than offsets the impact of lower demand for flow mortgage insurance. This is a testament to our strategy to segment and penetrate multiple distribution channels and the successful introduction of our HomeOpeners products.

HomeOpeners sales reached nearly $800 million this quarter and we are on track to reach 2 billion of sales by year-end. Rick will provide details on mortgage insurance persistency dynamics in a few minutes, but let me point out our good cost progress over the past year in domestic mortgage insurance did not continue in the quarter, with higher underwriting expenses incurred. So we have some work to do here.

Turning to long-term care, sales inched up over the prior-year quarter and the environment remains challenging. Looking beneath the sales picture to our five-part growth strategy, we are seeing an increase in submitted business, especially from independent channels, as our education and training activities take hold with several large accounts.

In the group line, sales were down 5%, as pricing continues to be competitive. We are driving growth on multiple fronts, and in the fourth quarter will introduce new voluntary disability products and a lower-cost dental offering.

Finally, we have made some exciting progress on several future growth opportunities and strategies, through both productline and market extensions. We launched Group LTC in August, bringing a solution to the long-term care dilemma at a more affordable price point and for younger consumers. We expect to launch a combination life and long-term care product in early 2006.

We also see distribution synergy between our LTC and Medicare supplement insurance products. Together, these three initiatives should generate meaningful sales in 2006.

European mortgage insurance sales are progressing well, and we expanded our global footprint in the quarter with our entry into both Japan and Mexico, two markets with strong potential.

In retirement income, we continue to be very optimistic on the outlook for ClearCourse, our group variable annuity offering for 401(k) plans that lets people buy layers of guaranteed income with equity market upside. Plan sponsors, consultants, and record keepers have responded to this product with great enthusiasm as their plan participants express the desire for guaranteed income options within 401(k) plans. We believe that we will have at least one, if not several, clients signed and using this product by year-end. We expect each of these next-generation growth initiatives to become a meaningful component of our sales in the next several years, and I am pleased with the progress we are making.

So to step back, our core growth platforms are hitting on almost all cylinders. We are making measurable progress in the repositioning of productlines where growth has slowed, with the U.S. mortgage insurance showing good signs of recovery. Our future growth pipeline remains full and our momentum is building.

Finally, we have a sharp focus on capital redeployment and will continue to pursue effective strategies in this area. With that, let me turn it over to Rick to provide more details of the financial results in the quarter.

Thanks, Mike. Good morning, everyone. Genworth delivered solid net operating earnings this quarter of $311 million and earnings per share of $0.65, up 18% from last year. Our book value per share, excluding OCI, now stands at $24.67.

We are increasing our outlook for net operating earnings per share to between $2.40 and $2.50. While our fundamental outlook for the business remains unchanged, we are incorporating the $0.05 of favorable investment items in the current quarter, along with $0.01 to $0.02 of mortgage delinquency seasonality in the fourth quarter.

You have already heard how our operating segments are making great strides on their strategic agendas, and I will focus on our earnings results. Overall, 7 of 9 business lines delivered double-digit operating earnings growth during the quarter, with solid performance in both the U.S. and International platforms.

Let me walk you through our high-level drivers. The reported premium growth was 2%, but I will remind you that this is impacted by runoff blocks of payment protection insurance and our pricing discipline in life contingent, immediate annuities and structured settlements. Excluding these two factors, the underlying premium growth was 8%.

Life premiums grew 12% as we continue to leverage our advantages in capital distribution and servicing. Internationally, payment protection premiums, excluding the runoff block, are up 16% from increased customer penetration, while our international mortgage insurance business delivered more than 25% growth in earned premiums as the business seasons.

Turning to net investment income, we had a 15% increase in the quarter, with a corresponding yield of 5.7%. Let me break this down into its pieces. We had $37 million of pretax earnings in this quarter in bond calls, prepayments, and partnership income, all of which tend to be less predictable.

Second, with a 90-day LIBOR of 200 basis points since last year, we're getting a yield lift in our floating-rate assets. But this is offset with corresponding liabilities and does not fall through to the bottom line. Overall, the underlying yields is where we expected it, about 5.1%. Going forward, the low interest rate environment and tight credit spreads will continue to challenge targeted improvements to the portfolio yields.

Interest rates have also had some additional impacts to our business. First, as I mentioned last quarter, our short-term sensitivity to interest rates lies primarily in our mortgage persistency, which fell to 59% in the quarter. Given results to date, we have lowered our full-year persistency estimate to the mid 60s. Currently, the 30-year fixed-rate mortgage has risen to above 6%, which at those levels should help stabilize refinancing activity over the next several quarters.

The flat shape of the yield curve also affects sales in some of our products. In mortgage insurance, when you compare our product offerings to simultaneous second mortgage products, MI becomes more attractive from a consumer monthly payment perspective. We believe this is good news for future flow of mortgage insurance demand. We are actively working with our lenders and others in the market to reeducate them on the potential advantage of MI for both consumer and lender economics.

On the other hand, traditional fixed annuities are adversely impacted by the flat yield curve and we saw that this quarter, as consumers are comparing annuity rates to other short-term investment alternatives. For example, with the average one-year CD rate at roughly 4% and the average traditional fixed annuity base crediting rate -- that is excluding any first-year bonus -- at about 3.25%, sales of this product are difficult. Going forward, we expect sales to reflect these market dynamics, while we continue to have strong pricing discipline.

Turning to margins across the products, we are performing within pricing ranges in most products and even outperforming in some. Our asset-based lines, like fixed annuities and institutional products, continue to see spread expansion of a few basis points each quarter as we reset crediting rates to reflect the low interest rate environment, while our portfolio yield has remained relatively stable.

Term life mortality as a percentage of pricing ran in the mid-90s, a sequential improvement, but less favorable than the very good results we saw last year. The long-term care loss ratio on an interest-adjusted basis is running within our expectations despite lower mortality-related terminations on our older facility only block.

In Europe, payer protection margins are stable, with combined ratios running in the 90s. Our new higher-profit business is offsetting the drag of the runoff block and is funding further investment in new countries. We expect to see premiums flowing in these new countries over the next three to six months.

Wrapping up the loss in margin discussion is mortgage insurance, where across the globe, our prime book of business is performing well. First internationally, the underlying loss ratio was 17%, reflecting the favorable global credit environment. During the quarter, a onetime adjustment to paid claims and favorable loss reserve developments reduced this ratio to 8% reported.

Our predominantly prime U.S. book is also performing well. In the quarter we had a positive adjustment in our prime bulk reserves that lowered our underlying loss ratio from 29% to a reported 24% loss ratio. We also had lower total paid claims compared to last year.

As expected, we began to see the seasonal increase in the number of reported delinquencies, but the increase reserves for this was more than offset by a mix shift in the overall population of delinquencies towards earlier stage dels (ph). If you look at the vintages of our U.S. mortgage business, the 2003 and prior books, representing approximately 60% of our insurance in force, have essentially passed their peak delinquency years and are performing well. Our 2004 and 2005 books are beginning to season through their normal loss cycles. When you take these together, we expect our loss ratio to move into the low 30s.

Let me wrap up the income statement discussion with a comment on taxes. As a newly public company in 2004, we had some tax inefficiencies. We entered 2005 with a goal to reduce our overall effective tax rate by 1 to 2 percentage points, by taking advantage of tax efficient assets and structures. We have seen that progress throughout the year and expect to close out 2005 down more than a full percentage point on our ETR to 32%.

Now looking at the business segments. In Protection, life operating earnings are up 29%, primarily from ongoing new business growth and good in-force performance. Also worth noting is that we funded an additional 300 million of reserves using our regulation Triple X capital solution, our fifth funding to date. You'll see the corresponding increase in nonrecourse debt on our balance sheet.

Long-term care operating earnings of 41 million were slightly down from last year. Though we are growing the overall block, the impact of ongoing investment income pressure, coupled with lower termination rates, are offsetting the growth gains we made. Additionally, experienced refunds on reinsured blocks were lower by 3 million. As I mentioned in the second quarter, we see the long-term care business flat for the full year relative to 2004.

Lastly in Europe, our payment payer protection business is doing well, delivering 23 million of operating earnings, up 10% over last year.

Turning to the Retirement Income and Investment segment, this segment performed well on many fronts. Net operating earnings of 59 million were up 48% from last year, mainly from 13% growth in assets under management and additional spread improvement. During the quarter, there was also a significant increase in bond calls and prepayments relative to last year, about 7 million in total. But excluding the impact from both periods, earnings were still up 32%. Net flows in the quarter were positive at 1.3 billion, with about 60% coming from institutional contracts and the remainder from fee-based products.

In the mortgage segment, we generated net operating earnings of 126 million in the quarter, up 24% in total and included 5 million of foreign exchange benefit. Mortgage international earnings were up 26%, excluding foreign exchange, from growth and ongoing seasoning of the in-force block. Our international unearned premium reserve now stands at 1.7 billion, a significant revenue pipeline, earned predominantly over the next 10 years.

In the U.S., mortgage insurance earnings were 58 million and included 9 million from a favorable tax item and 3 million adjustment to prime bulk reserves. These two benefits offset a $4 million impact to DAC amortization from low persistency and onetime expenses of 3 million. Adjusting for all of these items, the underlying business would have been flat with last year and consistent with our plans.

In terms of the U.S. housing market risk, we feel good about our positioning. As we see it, a national housing bubble is unlikely, but there will continue to the regional corrections as in the past. U.S. home price appreciation remains strong, driven by low mortgage rates, a tight housing supply, and innovative, although potentially higher risk, mortgage products.

From Genworth's perspective, we manage risk with good product dispersion, less than 7% of our risk in force and ARMs and less than 5% in all day (ph), for example; and geographic dispersion, where we have just 5% of our book in high-risk MSAs, which comprise 20% of the U.S. housing market.

Finally, turning to our capital, we currently sit at about 1.4 billion of deployable capital capacity, comprised of 600 million of excess surplus and 800 million of additional debt capacity. This amount does not include the 6 to 800 million of excess contingency reserves in our mortgage business. We remain focused on working with regulators to release these reserves over the next few years.

In terms of redeploying this capital, we continue to look for acquisition opportunities that provide accretive returns. And we now have the ability to work with our Board of Directors to consider an open market share repurchase program, which remains an important component of our capital strategy.

Finally, in September, we raised our quarterly common stock dividend 15% to $0.075 per share. We are looking forward to updating everyone on our strategic plans for 2006 when we host our annual investor day on December 8. With that, I'll turn it back to Jean to start the question-and-answer period.

Thanks, Rick. Operator, we're ready to go to the question-and-answer session now.

(OPERATOR INSTRUCTIONS) Rob Ryan, Merrill Lynch.

My question deals with the international mortgage insurance, where year-to-date earned premium is up about 33% and risk in force is up 41% compared to September 30, '04. But there is foreign currency effects and spending for expansion into new geographies, both of which could continue into the future, especially the spending as you may be go into Mexico.

So what is the basic growth expectation in terms of a bottom line for this operation, say, into the intermediate-term? What is sustainable? How much slowdown should we expect or pickup from new geographies, that kind of thing? So maybe like the growth expectation, ballpark, for '06?

Great question, Rob. Let me turn that over to Tom Mann.

Again, terrific question. Let me start the reminder that I think I have tried to offer in all instances here. We have had terrific growth internationally over the past couple, three years and it has been what I would call very, very strong double-digit growth, as you know, in the 25, probably 30% range. We do not see that continuing, although we do see it continuing at very strong double-digit growth rates.

So to your question, if you look at the growth in new insurance written, I believe you mentioned in risk in force, that is a terrific indicator of future growth because again it means that we're building our books of businesses and the future income streams related to the earned premiums, if you will.

We were at about a 14% growth rate, I think, if you adjust out some of the foreign exchange adjustments that you mentioned and also the loss factor update that we had in Australia. In fact, if you throw that loss factor update back into the numbers, we would probably have been at a 20% year-over-year growth rate in our international operations. Again, very, very pleased about that.

You've mentioned the continued investment. That is investment that we're not only making in Mexico, but we're making Asia. And yes, to your point, it is material. And the idea there is that we want those businesses to begin to kick in, with reasonable growth rates as we move ahead. I think Mexico is a perfect example of that. So while we will probably feather in this year at, again, strong double-digit growth rates in our international operations, we're going to be focused on the same next year, and Mexico in fact will be a contributor to that. It has got a very short growth period in front of it, if you will, because we have entered that market with a reinsurance agreement with the Mexican government, as an example.

So long answer to your question, the short summary of it is we continue to expect on a going-forward basis very, very nice double-digit growth in these international operations, not only from our established platforms but from reaping the investment in the our rest-of-the-world countries as well.

Could you give us just a few details on the specific timing expected for things in Mexico? Has the Legislature passed the necessary bill? What is the size of this startup reinsurance agreement that you're looking at, that type of thing?

You need to think of Mexico in two buckets. And the first would be the reinsurance agreement that we have entered into with the Mexican government. I am not going to get into the specific side of it, but what the Mexican government is doing there is supporting affordable housing lending and working to create a more robust mortgage insurance market and securitization market in the future. So we're going to be getting income accretive from that immediately, and let me leave it at that.

With regards to the legislative initiative to open that market up to direct underwriting of mortgage insurance, while I always have a habit, Rob, of never trying to predict success in that regard, we feel reasonably comfortable that we will have that in fourth quarter of this year and we will begin to write business, direct business in Mexico possibly as early as fourth quarter, first quarter of next year.

Very good, thank you.

Jimmy Bhullar, JPMorgan.

A couple of questions. First in terms of capital deployment, as you look across your various businesses, Mike, which ones do you think would benefit the most from a potential acquisition? And then I have a follow-up for Tom.

On that front, Jimmy, I'll give you a couple of perspectives. First -- and you have seen an indication of this quarter -- we would like to add both scale and capability to our retirement income investments business. You'll see that on two fronts. One, we look forward to continuing to extend distribution reach; hence the acquisition of an adviser network to complement an existing network we have. And would also like to continue adding some niche asset managers.

I think we basically have enough strength in our income distribution strategy to, with all of the core productline, the full product suite, the innovative lineup on the group side and the 401(k) plan, we do not need to buy capability there. We just need to grow off what we have. If you picked up a block here or there for some additional scaleups, that's fine.

Then the second area that would benefit is within protection, though in targeted areas. First, we like and you can see the progress in the growth profile of our life businesses. I think you'll continue to see some consolidation in the life sector. I think some of that may be blocks of business, some may be smaller companies. Those would be a very nice fit with our platform, and George and his team know exactly what do with those. And we may get some more incremental distribution with that, even though we have strong distribution.

As you know, we have also looked at where we could get more scale within our small group operations, just given our roughly 600 million premium range we run in, and we would like to be in, frankly, double that range. We have looked at different opportunities, we have talked to players. There has not been a lot moving out there lately on that front, but we have certainly looked at it there. So those would be the two biggest areas that we would be focusing on.

And then internationally, if we find something complementary to businesses we are in, that is really what we would look for. Tom has done that in the past in mortgage insurance in Canada and Australia. So we would be very selective on that front. But if we found something that accelerated our two international businesses, that could be in the target range as well, Jimmy.

I just have a follow-up for Tom. You have had very strong growth in Australia. Some of your competitors claim that you're being too aggressive in the market. Maybe they are complaining because they are losing market share, but if you could just talk about what is driving your growth in Australia and your outlook for that business.

Well, I'm certainly not going to comment on what my competitors have said. I will remind you that we have been in -- as a matter-of-fact, I'm going to take a couple of deep breaths here -- we are going to -- we have been in the Australian market since acquisition. Since we entered that market in the mid-1990s, we have grown consistently since we have been there, through our upfront execution, our sales force execution, our product delivery in that market, our service levels. By all standards that we have there, we believe that we are delivering in a wonderful fashion and we will continue to do so.

Has the competitive environment changed at all in the past few weeks as the U.S. companies started the integrator presence in that market?

I'm sorry, Jimmy. Could you repeat that, please?

Has competition picked up there as the U.S. companies try to gain a greater presence in the Australian market over --?

Certainly not in past -- the only competitor -- you are aware of our competitive market in Australia today. As of the moment, there have been no additional competitor entries into that market. There could be in the future.

Okay, thank you.

Vanessa Wilson, Deutsche Bank.

Mike, you have your ROE target set out for 2008 and you had a very good 2005, with some onetime good news from prepayments, etc. Should we think about this as a stairstep progress or should we see a little less progress in 2006 given the tough comparison you have versus '05?

First let's look at 2005. 2005, we are tracking quite nicely when you think about some of the dynamics here. One of the dynamics coming off of the 9-8-2004 base was what would be the amount of stand-alone costs and what would be the comparison of 2004 versus 2005 calls and prepays. So net-net, we will probably lose 40 to 50 basis points if you look at that. We will probably pick up 80 to 100 basis points between our growth, our tax efficiency, as well as other cost efficiencies we have. And then when we redeployed capital, such as you saw in the $500 million share repurchase, you pick up 25, 30 basis points. So that will probably bring us in in a 10.3 to 10.5 range.

But as we look forward, we have stayed very, very firmly fixated on that 30 to 50 basis points per year. And then the nice thing is we have multiple levers to use to achieve that. So our goals on that front have not changed.

Mike, if I could just follow up with one piece of the model. Rob asked about the international MI business, and we have guidance of a low 30s loss ratio in the domestic business in 2006. That is going to be a tough comparison versus 2005 versus the loss ratio. So should we think about the tax efficiencies and the capital efficiencies as enough to offset that potentially negative swing in that business?

First of all, certainly the capital redeployment area that both I touched upon and Rick touched upon is a very important lever for us. And again, we will focus on more than one lever there. In other words, we will look at continuing our search for attractive acquisitions. An ongoing share repurchase plan can be an important component of that. And then periodically, we will look at our dividend rate.

We think we will continue to make some progress on a gradual basis on the tax line as well. I think both of those, plus the core growth that we have seen will help provide some offsets. Rick, do you want to add any more color?

In the mortgage U.S. business, which you referred to, the loss ratio will be going up. I think the other piece of that which you should look at is going to be the persistency levels which we are at. And as those ratchet up with a 10-year over 6% and rising even today, that is an important offset you'll need to look at.

Thank you.

Andrew Kligerman, UBS.

I have a few questions. I guess just to start, you mentioned earlier in the call pricing being difficult in the group market. Could you give a little more color and then I will specify my follow-ups?

I'll just give you a general observation, and that is it is a very competitive market. And I think you have seen probably more people coming into the smaller size company markets over the past 24 months and that is reflected in that. So I know there has been discussions about discipline and case hardening, but there are a lot of participants in that market. George, do you want provide any more granular insights for him?

I think what Mike said is a good general statement. I think especially in the non-medical group productlines, where we are seeing more non-traditional competitors.

Disability and life insurance?

It is actually twofold. We are seeing some of the traditional group players that have historically focused on the larger employers move downmarket and we're starting to see some of the health insurers also provide ancillary non-medical products as well. And that is just making it a little bit more competitive.

And then on the medical side, especially in stop loss, we have experienced a very, very tough pricing market as an industry for the past several years. We are trying to maintain our pricing disciplines above all in that market, and we're starting to see some encouraging signs that pricing may be beginning to harden, but it is still a little early to tell.

Okay. And group life and group disability as well, those products.

Yes, as well as dental. Those three are the non-medical lines.

Great. Now shifting over to the protection business in terms of mortality, the indications were that mortality experience was favorable to pricing. But it appeared better than recent experience. For example -- and tell me if my model is wrong, but the benefits ratio as a percent of premiums was 79.2% in the third quarter of '05 versus 83.4% in '04 and 85.5% in the first half of '05. So can you tell me if it is just my model or if mortality really was more favorable than even past favorable to pricing?

The way I would talk to you about it is we like to look at actual-to-expected mortality performance versus our pricing expectations. I think that is a good proxy.

Maybe you have some stats on that.

-- for the benefit ratios. If you look at our third quarter of last year, we had a very favorable quarter. Two standard deviations favorable with an actual to expected in the 84% range. We were pleased to experience that, but we knew that that was a very unusual quarter.

This quarter, we delivered favorable mortality versus pricing. We are at 95% actual to expected, which I think is a positive sign of our pricing disciplines and our underwriting disciplines, but a tough comparison versus the third quarter of last year.

I guess they're just too many factors that I can't do a very basic modeling as a percent of premium. Is that what you would say?

It's probably better done off the call.

Okay, we will do that. And then one last question. In the press release, you mentioned that spreads improved. Could you give us a sense of the basis points improvement? And then there was some mention that it could be some sequential spread improvement. Maybe you can talk about what the spreads are, where they are going, why they are going there.

Rick, do you want to take that?

Sure. If you look at the spreads, we did see a couple of basis points. And we do some normalization, especially with the bond calls coming through the line; we did see a couple basis points, actually over the last few quarters. We do expect to see that coming through as well. As I mentioned, we're resetting down some crediting rates that were at higher guaranteed levels, and our yield has remained relatively stable on that line. So we are seeing --

You're not feeling much pressure on the yield going forward?

We are not in those particular lines, no.

Okay, not in those. So you've got a long enough duration that the pressure is not there?

That's correct.

Great, thank you very much.

Colin Devine, Citigroup.

Four hopefully fairly straightforward questions for you. First, if we could talk a little bit about the term insurance business, what really was behind the huge sales increase? And also with the securitizations, what sort of cost advantage do you feel you're getting over using securitization versus reinsurance? And perhaps if you want to comment, Mike, as to why you have got five deals done and I think one of your competitors has got one and the rest of them are still working on it.

Secondly, you sort of alluded to a potential share repurchase program. You have had a Board meeting since the secondary. I guess the question is why aren't we hearing about one today in terms of being announced?

Third, if we could talk about international MI just quickly -- it all gets lumped together. I think it would very helpful if you could give us just some broad outline as to your geographic split and where the earnings are coming from, how much of international MI is out of Australia, how much is coming out of Canada and maybe just a bit of color on how those markets are performing.

And then on the European payment protection, there is starting to be some chatter out of Europe in terms of increased regulatory scrutiny on that product. We've seen certainly that happen here in the U.S. and I guess that was part of the issue in the UK. (indiscernible) actually give us some color on that, too. Thanks.

Good list, Colin, as usual. Let me just start at the top and then a few of these I'll go back and forth with whether it is George or Tom.

First, on the term business, we very much focus on doing three things in our term business. One is we were going to be a capital markets leader to handle the capital efficiency challenges that are out there. We put the resources behind it. We have certainly gotten good external help on that.

So when you look that again, we felt that versus standard reinsurance solutions -- and if you want to use ROE as your comparative basis -- you probably end up 400 basis points more efficient going to the capital markets than you do with a standard reinsurance solution.

Now what we have seen quite clearly is every time that you work one of these approaches, you get more efficient; you also find more ways to do it. I think a good analogy for you would be the maturing of the ABS market over time, how tranching happened, how different investors came in, how you can use different vehicles. And that is what we have seen. Everything from what markets you are tapping, whether it is a Dutch auction market or a term market, for example. So we have experienced good efficiency in this area and that has only helped our position.

I cannot comment on why others have had fewer. You have seen some other transactions out there. But as we've said, these are not easy things to do and you need excellent mortality performance. And as George just talked about, that is something, because of our disciplined underwriting, we have had.

On the share repurchase question, we have not had a Board meeting. In fact we have two Board meetings between now and the end of the year. So you can factor that into your thinking. Again, the way we think about an ongoing share repurchase plan is this can be an important lever. As Rick pointed out, with our excess capital capacity of 1.3 billion split between 500 surplus and 800 of debt capacity and that is growing to year-end, we have the flexibility to both pursue acquisitions that we could find attractive, fund any additional core growth, but also be able to fund a repurchase plan. So I think we're in good shape there and we will give that the appropriate scrutiny.

Just on international mortgage insurance, if you break it down, you can think of Australia and Canada as the two countries that are the primary growth engines of earnings right now. And we very much view Europe, where we have been active in 8 countries -- we have presence in 10 countries right now -- but we view it as Europe and rest of world, meaning Mexico, Japan, Asia. That is sort of the next generation opportunities. So they are still a relatively small part. In fact, a relatively small part of the entire mortgage insurance business.

But that is the upside, that as Tom and the team have invested, they've put people on the ground in these countries -- we have 20 people on the ground in Japan and we just opened up in August and we have been working that for a year; that is indicative of the very disciplined core growth approach we take -- that will deliver NIW over the next any place from 1 to 5 year time profile.

George, let me hand it to you on the European payment protection and some of the dynamics we have certainly seen to Colin's point.

Colin, a couple of points. Your question is a very good one and your observation is an astute one, that we are seeing some increased regulatory scrutiny on payment protection products, but it is right now concentrated the UK. We're not hearing that on the continent. And in the UK, it is really focused in two buckets.

One is the FSA, the regulator over there now, has assumed responsibility for general insurance, so they are in the process of doing a fanatic review of all general insurance products, including PPI. That review is ongoing. We view that as a positive thing, but no major issues jumping out at this point.

The other bucket that the regulatory scrutiny is falling into is really around distributors, not necessarily the PPI product. The store card -- credit card -- private-label credit card industry in the UK is being looked at in terms of their selling practices of insurance products that accompany the card. And then a number of Irish and UK providers are being looked at in terms of the practices that they use to provide refunds to clients in the event they had a single premium product and they then canceled it.

So the scrutiny is really on distribution. We're working very close with our partners on the store card side and in Ireland in particular to work through the regulatory process with them. But the net-net, as we look at it, is there is no question about the value of payment protection insurance to consumers at this point. There is some scrutiny around selling practices by distributors.

Just a quick follow-up, Mike. Could you give us some idea of the relative size of Canada versus Australia in international MI?

Go ahead, Tom.

Colin, again, the Canadian, as Mike had indicated, probably 80 to 90 percent of our income today is coming from our established platforms of Canada and Australia. Canada generally spends more income than Australia simply because the pricing is a little bit richer there. So I am going to again, depending on the size of the books and how fast you've grown, these dynamics can change, but I'd probably give that about a 60/40 split probably in Canada versus Australia. But that can change. 55 60 in Canada of our established platforms.

Thank you very much.

Mark Finkelstein, Cochran, Caronia Securities.

Just a follow-up to the prior question on the term environment. I know a couple of contenders have reduced prices in that product. I'm just seeing if you are seeing some compression on pricing and what your outlook in terms of growth is. And I guess following on that, whether that can be made up through growth in the BGA network, etc.

I'm going to give that to George.

Mark, clearly we're having a fabulous year in term this year, performing better-than-expected, better than guidance. Year-to-date our sales are up 35%. And we have been pulling three levers really to drive that growth. One is to be competitive on price in the marketplace. Second, we have been expanding our distribution nicely and we are on track to add 50 new distributors by year-end.

We have also invested a lot in providing good quality service to our clients. One example I'll use is we are now up to 70% of our term life insurance business is processed through our automated underwriting system called GENIUS.

We did make some very competitive pricing moves earlier in the year and, unlike prior years, we did not see an immediate response from a number of our competitors, and we really grew handsomely in the second quarter in particular on a submitted basis. And I think you saw that come through in our sales in the third quarter.

We have seen a couple of competitors sharpen the pencil and get a little bit closer to us on pricing, and we are seeing a little bit of a stabilization in our submitted application accounts. But there are just fewer competitors that are with us versus the 10 or 12 that used to be there in prior years. So we clearly are going to see a normalization of our growth rates, but as I look forward, I think something in the double-digit growth rates is clearly in the cards for us.

Okay, perfect. And then just a quick detail question on long-term care underwriting trends. One of your competitors I think back in the second quarter noted a slight blip or increase in persistency. I'm just curious if you are seeing any similar changes in the non-travelers block on that business.

I cannot comment on what our competitors are seeing, but we are not seeing anything material with respect to persistency and certainly not as it relates to underwriting.

Okay, perfect. Thanks.

Tamara Kravec, Banc of America Securities.

A couple of questions. Can you break down the prepayment income into long call (ph) prepayments and the income from partnerships at all? Do you have that?

That's Rick McKenney.

Let me give you a view of that in the quarter and I'm going to try to do it on the fly here a little bit. And these will be on a pretax basis. You would be looking at bond calls and prepays of about 20 million net of accelerated amortization of DAC. And then limited partnerships of about 16 million pretax, when you tax adjust those.

Okay, and the limited partnership income, was that just higher based on the equity markets? That seems to be higher than what you normally have.

It is higher than what we have seen and part of that was due to some restructurings within the limited partnerships that created distributions. We would not expect to see that, as we have said, going forward.

Okay. And then just looking at your overall top-line growth, we are seeing top-line growth this quarter and premiums after a few quarters of negative growth. And just looking at your sales patterns now in your core businesses, what would you expect to be a reasonable run rate for premium growth looking out to '06?

I think that is something that we would lay out investor day, but what you saw this quarter, you heard the dynamics from George as well as the runoff blocks and life contingent annuity sales. So you'd be looking somewhere around that number, maybe a little bit less, for our core premium growth.

Okay. And then just on the MI business, there has obviously been talk of changes in the mortgage tax deductibility. And I was curious if you had an outlook on that or whether you think that would significantly impair your MI business, if anything would go through like what they are proposing.

Tamara, this is Tom. Boy, I knew someone was going to ask that. Again, I try to never predict Washington. Clearly, if there are changes in the tax laws as it relates to the tax deductibility of mortgage interest, I think one could argue that that would have an impact on housing finance in the country.

My response to that would be that because housing finance is such a stable, important part of the U.S. economic environment, that I think that any changes -- my view would be that any changes to that tax law, if they do occur -- and I think it is reasonably remote -- but if they do occur, I think they will take that into consideration.

But long-range, if it does occur, it would serve I believe to deflate a little bit of the housing values growth that we have had in the country. But again, I think it is a reasonable assessment that should those proposals find their way into tax law, that it will be dealt with very carefully to make sure it is managed very carefully.

Okay. And then, Mike, just a question, I guess a follow-up to Vanessa's question on the ROE. Am I wrong in thinking that your previous ROE goal was 10.1 to 10.3 for '05, and you had said that with some of the levers you have, you're now tracking 10.3 to 10.5?

That is correct.

Okay. And that is with the bond calls and prepayments obviously intact?

That is. And that has been fundamentally -- more Bond calls and prepays have come through than we expected.

Okay. Great. Thank you.

Steven Schwartz, Raymond James and Associates.

First, just on the guidance for the year, I just want to be clear. The number for the guidance, does that include a certain level of bond calls and prepays for the fourth quarter?

We have been always consistent in not having a forward look on bond calls and prepays, so we exclude that, Steve.

That is what I thought. I just wanted to make sure. I was wondering if somebody could touch upon the long-term care market and what is going on out there. I guess there was -- I recently saw an article, I guess it came out of an ACLI meeting, where people were talking about maybe the individual market was turning. I was wondering what your thoughts were there, if there was anything in Washington maybe with reasonable chance of passing that might spur that on. And maybe you can talk a little bit about the competitive dynamics in the group business. I am familiar with the individual business, but not so much the group.

Let me provide you with a couple perspectives and then turn it over to George. I just came back from spending some time in Washington on this topic.

I think overall, the awareness level about both the long-term care need -- you might even call it crisis -- in this country has gone up and gotten a lot sharper this year. I think that comes from a variety of sources. It certainly comes from the states, who feel the pressure on over 40% of Medicaid spending being attributed to long-term care, and that is only headed up.

I think it comes from activities such as the pilot George talked to about that Health and Human Services did with some of the states, to send letters to people over the age of 55 saying they ought to look at long-term care. It has come up in various forms of interest groups, whether those are senior groups or whether those are people who are preparing for retirement groups.

And you have seen it was various councils in Washington, and there'll be a December White House Council on Aging that I'm sure this area will be addressed. So awareness is way up.

As far as things that could help provide a catalyst, I would say the best bet is the state partnership programs, where it is sort of a public/private partnership. Only four states them have the right now -- New York, California, Connecticut, and Indiana -- where an incentive is created for someone to go out and purchase long-term care insurance. And once they deplete that policy, have the option either of getting access to state aid, but keeping an additional level of assets. But more likely than not, they may never need to go and get access to state aid because that policy will give them good benefits.

A lot of interest in that. A number of state legislatures have already passed legislation approving those programs, pending change in federal law. And since that has less of a revenue impact, I would give that the best opportunity. Some other incentives will be looked at. As far as specifically within the group market, George, do you want to comment?

Before George gets on, Mike, you're talking about -- these are the programs where basically the benefits that you receive from a long-term care policy are then protected from the Medicaid spend-down?

There are different formulas that can be used, but one is called like a dollar-for-dollar credit. So you get credit from the spend down for the benefits you have received. But again, if you look at the types of policies people oftentimes buy, that may be exactly the safety net that they need.

So the dynamics if you were sitting there as a state governor would be, I can delay someone coming on the potential roles and I may even prevent them coming on at all if that policy is adequate to serve the needs that they have over their lifetime. So those are both very attractive dynamics from a public policy standpoint.

Steven, this is George Zippel. The reason that we like partnership programs is if you go back over the past several years and you look at the sales growth rates in those four partnership states versus the other states that don't have partnerships, you'll see a substantial and material difference -- much higher growth rates in the partnership states.

A couple of quick points to follow up on your questions. One in terms of what is going on in the LTC market today, it is still little choppy out there. You've got two dynamics that I think are still working through the industry. One is the exit of Allstate and Lincoln Benefit Life just kind of working its way through. They announced that last quarter.

And then we're almost coming to the end of some new product with higher price points from four major competitors. Those are almost done, and I think as those terminate in the next couple of months or so, that we will begin to see some stability in the market.

I'll tell you, the one encouraging sign that we see is the growth rate that we are experiencing on our independent channels, the banks and the broker-dealers and our independent agents, where we are up on a year-to-date basis, on a place basis. I think are realignment of our wholesalers with those accounts and the education that we're providing for them is starting to pay off.

We had talked in prior quarters about three of our larger independent accounts had lost focus on the long-term care market. We actually saw an increase in submitted applications sequentially from each of the three this past quarter. So that to me indicates that they and some of their agents are getting back into the LTC game.

Okay. And on the group side --?

In the spirit of time, I'll try to be brief here. If you look at group, there is a couple of big LTC players that are in that market. You probably know who they are. They tend to focus on the larger employers. We are going to be focusing on the small to mid-sized employer group; we think it is underserved.

And we have been hearing for years from a number of firms that they would love to have the brand-name of Genworth get into the group space because of our good reputation in individual, and we are in there. And actually, we launched a product just last month and we have already signed up our first group account. So we are off to a good start.

Okay, great. Thanks.

Joan Zief, Goldman Sachs.

I just have a few questions. First, you talked a lot about acquisition activity as where you thought there was opportunity. But if the markets change and you don't see as much progress as you have had, would you consider divesting the U.S. mortgage insurance division? Would you consider selling your group to somebody else if you can't get somebody to sell their group to you? And are those possibilities?

First, Joan, I'd give you the observation when you look at how we drive return on equity, of course, we have multiple levers. We have core growth. We have the runoff of the legacy blocks. We continue to work the cost equation. We have a good multiyear opportunity coming off a low base in investments. Plus then, as you point out, the capital redeployment lever that has acquisitions and repurchases and dividends as multiple levers. So we're not dependent on any one lever.

As far as your two specific questions, we have a very clear view that we can take our U.S. mortgage insurance business over a four- to five-year period from just above a 10% ROE up to towards right around 15%, which we think we can do driven by both new product and, as Tom has talked about, a far more segmented distribution strategy, where we're going after a number of new segments that have higher return characteristics.

And it was by choice in the past before we became public that we focused on big volume national accounts, but those were lower-return accounts. So we think there is good value to be created for shareowners. And you are seeing progress on that front. So that is not something we're focused on in our strategy and we think, once again, that the diversification we have had in Genworth in these three very, very key markets is an attractive strength and delivers less interest rate sensitivity.

You asked about our group business. I think one or two calls ago, I got a question about that. And because of its relative size, we bought a business from a mutual that needed a lot of investment. This was 2000 timeframe. And unfortunately, we were on the sidelines, getting ready to take this company public. I don't think we had even announced it, when a number of companies traded.

So we focused on core growth, technology, our product lineups, service, and when we looked for acquisition opportunities. So we want to give that -- we're looking at the business, giving it a two- to three-year horizon to get to a bigger scale, and we will see what we see. Every business has to show it is a growth business. Every business has to show the capability to not only have a good but an expanding return on equity. And that business will be held to the same standard. So we will play that out.

Okay. My next question is, you gave us guidance on the U.S. mortgage insurance loss ratio, where it would move to as the different books started to mature and reach peak. What is the guidance you can give us on the international mortgage insurance loss ratio?

Tom, you want to take this?

Joan, this is Tom. The guidance we have given historically on the international business is that they would season consistent again with your comment about the United States business. We will probably be looking at 12 to 15% loss ratios this year, and I would move those to the 17 to 19% range for 2006.

My next question is in the past, you have talked about earnings guidance, earnings growth, or that you would like to see of around 10 to 12%. I know this year is a great year because of mortgage -- I'm sorry, because of bond calls and prepayments and things like that. So is it fair to think that your expectations for growth into 2006 are going to be lower based on reported earnings this year? Or do you really think that earnings are earnings, wherever they come from, and you should be able to do your targeted 10 to 12% growth next year and the year after as well?

Well, Joan, it's Mike. I think -- you know us. I don't think we ever think earnings are earnings. That is why we provide you very good visibility on foreign exchange, on bond calls, and are quite consistent in doing things like stating how we do guidance. And not baking things in. So you'll give us a break on that one, right?

Now looking forward, we are very much going to use investor day to give you a good look at the growth rates, both individually and collectively, so I am not going to use this as sort of the 2006 call. I will use investor day with the team here to do just that.

I guess what we have tried to do is give you more color on how to think about growth. Again, you look at 60 to 65% of our earnings have been running out of those four growth engines of life, retirement income, basically international mortgage insurance, just from Canada and Australia, as well as payment protection, and we like how those businesses are lining up. We feel good about the double-digit growth that they demonstrated.

We have given you another category we call the repositioning businesses, businesses that were growth machines and then because of market conditions, sometimes some other factors, have been flat more recently. And hence, the real focus in spending a little more time with you in my comments on how are we doing in U.S. mortgage insurance. And we are very focused, as Rick and Tom mentioned, on seeing persistency come up, and we think we will with the move in rates and getting the growth profile restored over time in long-term care. But both of those markets have their challenges as well.

And then there is this whole next generation of growth. Now you can look at mortgage insurance in Europe and rest of world, payment protection beyond the 17 countries in Europe where we are, the moves in the long-term care in areas like the group market, and we're doing some international studies as well. You look at retirement income and the whole movement of the group market, with the income distribution option within a 401(k), which we think is a business unto itself. And then, hopefully, see more opportunities such as we have in long-term care, where other people distribute our product. Those are the whole next generation of catalysts. So some of the timing of those kicking in will help provide additional catalysts, as well as balance to the overall lineup.

So that's how you can think about it. And then we look forward to updating you at investor day.

I guess my last question, which I guess goes back to what Colin was talking about, is can you give us some indication as to when the next Board meeting is?

We have two board meetings between now and year-end. We have one that is right at the end of October and we have one that is right at the first couple days of December. And that's sort of our schedule.

So we are very thoughtful about how we redeploy capital, as I've talked about. I think we've demonstrated that in the past. Where we pursued repurchases, you saw the 15% move in our dividend. You see us continuing to run off capital from the old blocks and redeploy it; so we will continue to thoughtful.

Thank you very much.

Thomas Gallagher, CSFB.

Just to revisit the excess capital issue, I know we probably beat that to death here, but I'll give it one more crack. Two questions related to it. Share buyback, do you have any restrictions on buying the stock depending on whether price is?

Tom, it's Mike. First of all, for a period of time, I think it is 180 days, we cannot buy back shares at less than the secondary offer price, which was, as you know, it priced out at $29.50.

Yes.

And then there is of course the distribution discount on that, so that gets factored into it. So that is what -- $28.70.

So $28.70 is the bogie?

Yes. So you take that less the distribution discounts.

Okay. And then just thinking about excess capital deployment. I guess, Mike, you talked about life insurance or protection business is sort of secondary in terms of M&A opportunities. But I guess -- I'm just curious in terms of how you're thinking about potentially using the Triple X capital market solution from an M&A context. Because obviously you can leverage the ROE using that with new business today, but I would think there would be greater leverage looking at potential M&A opportunities related to that.

You know, could it be a factor? Sure, it could be a factor, but there is not much to go into beyond that. And let me just be clear. I've talked about the retirement and protection. There are a number of parallel opportunities. I just had to talk about them in some order, so I picked an order, okay. But I talked about two, so somebody had to be second.

Got it, okay. I guess just last question would be, given that Canada is your largest international MI earner, can you just talk about what is happening in that market right now, how the growth has been trending, and is there risk of the government lowering pricing again over the near-term in your opinion?

Tom, do you want to give Tome some perspective?

Tome, let me start from the bottom and work back up. It is hard to judge the risk or comment really on what your competitor, whether they be the government or not, will do as we report. So I am not going to go into that, other than to reflect that we have had the one price decrease already. So one may judge that would be kind of enough.

The market in Canada has, similar to Australia -- as a matter-of-fact around the world -- has had robust growth. It did slow up a little bit this year, and we in the past have said we think that is actually pretty good because we do need a slowdown in the level of housing finances around the world to slow the growth in appreciation. We've seen that. We are very, very pleased about that.

We continue to penetrate the Canadian market. It did slow up a bit this year, but we think we're on the track to restore that. And so I continue to feel very, very good about our progress in the Canadian environment. And as we think about its future, as we indicated earlier, again, I would put that in the bucket that Mike has placed of our established platforms that we expect to continue to roll along at very strong double-digit growth.

Tom, just to follow up on that, has it still actually grown from, I guess, a new production standpoint? And it is a just a slow growth rate or is it actually contracting and how have margins been trending?

Again, absent the 15% -- from a pricing perspective, absent the price reduction that we all did, margins have been quite solid. Again, we have seen a little bit of a deterioration in margins, only because our business is seasoning. But again, you've got to remember from where we started, and that is from a very, very low loss environment, it's exactly what we expected.

Again, the market in Canada year-to-date has been up a little bit. But again, the market growth has not been that strong and our penetration in the market has been up a little bit too. So historically what you have had there is very robust growth in the housing finance levels and robust growth of our penetration there as well. Both those items, Tom, have slowed up this year.

Got it, okay. Thank you.

Thank you very much, sir. Ladies and gentlemen, that concludes our Q&A session. I would like to turn the call back over to Ms. Peters for any closing remarks.

Thank you, everyone. We will talk to you as we go through the quarter. That ends the call.

Thank you very much, Ms. Peters, and thank you, ladies and gentlemen, for your participation in today's conference call. This concludes Genworth Financial's third-quarter 2005 earnings call. Thank you for your participation. At this time, we will conclude the call.