Genworth Financial Inc (GNW) 2005 Q4 法說會逐字稿

Welcome to Genworth Financial's fourth-quarter 2005 earnings conference call. 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. Also we ask that you refrain from using cell phones, speaker phones 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.

Good morning everyone, welcome to Genworth Financial's fourth-quarter 2005 earnings conference call. You know the press release and financial supplement were released last evening and are posted on our website. This morning CEO Mike Fraizer will discuss highlights of operations, then our CFO Rick McKenney will take you through the quarter's earnings, the 2006 outlook and update on capital management. Also on hand for the call are the three heads of our business segments, Tom Mann of Mortgage Insurance, Pam Schutz, Retirement Income and Investments, and George Zippel, President and CEO of Protection.

In regard to forward-looking statements and the use of non-GAAP financial information elements of our comments today are forward-looking and are based on management's best view of our world and business as we view them in the current operating environment. Prior to joining this call you are asked to read and acknowledge that these elements can change as the world changes, we ask that you interpret our comments today in that light.

Today's presentation also includes the use of non-GAAP financial information and measures that we believe is meaningful to investors. In our earnings release non-GAAP measures have been reconciled to GAAP where required in accordance with SEC rules. Before we proceed I would like to announce two dates that we are planning for investor update meetings in 2006; so you can get them held on your calendars early. On May 18th we expect to hold a half-day meeting in New York to discuss a number of key strategic growth initiatives and we are planning on December 5th to hold a strategic update meeting to review the year end, our outlook for 2007. We obviously will give you more specifics and details as those dates approach. But this is to let you get them on your calendars. With that I am pleased to now turn the call over to Mike Fraizer our CEO.

Thanks, Jean, and good morning. 2005 was a great year for Genworth; we delivered 18% growth in operating earnings per share for the year and made steady progress towards our goal of a 12% operating return on equity by the end of 2008. Increasing our ROE by 90 basis points during the year to 10.7%. Our core growth engines delivered solid results and will drive earnings and ROE expansion in 2006.

We had some unusual benefits in investment income but fundamentally our progress was based on executing our strategy and being more agile as we pursue opportunities. In addition, our international presence between Payment Protection and Mortgage Insurance, represented 29% of our earnings on a full-year basis. Let me share a few highlights from the quarter and perspectives on 2006.

The protection segment has great traction in its life operations, term life sales were up 37% in the quarter and we see another strong year in 2006 with expected sales growth in the mid teens. Payment Protection sales were up 20% as we continue to add strong, long-term client relationships. The Southern, Nordic and Central European regions are growing nicely and we are building our presence in four new countries, Poland, the Czech Republic, Hungary, and Greece. We are also poised for entry in Mexico in the next few months.

Long-term care sales were up 12% from both the prior year and previous quarter bringing the total year sales growth to 5% against an overall market which saw its third sequential year of decline. Sales growth in the Long-term care business came primarily from additional coverage purchased by group plan participants and sales of ancillary products. But overall we saw stability in our Long-term care sales. And solid relative share gains for the year letting us maintain our number one position in the individual LTC market.

What stands out to me though is that consumer, distributor and policymaker sentiment towards the product is turning more positive. In 2006 we will continue to be very engaged in further educating these groups on the importance of Long-term care insurance and we are encouraged by public policy actions that demonstrate the value of Long-term care insurance to consumers. Such as the recent separate Senate and House approvals of the Public Private LTC partnership programs for all 50 states. Partnership programs now require one additional affirming vote in the House, congressional approval plus a program rollout at the state level would serve as a sound market catalyst.

At Investor Day we talked about our protection strategy of helping people create personal financial safety nets at different stages of life. And one part of that strategy included expanding our senior market product offerings. As we look ahead we see an evolving market for supplemental or gap filler products for seniors with that market today centered around Medicare supplement offerings. We've had a small position in the Medicare supplement market from prior acquisitions but no real senior supplemental product platform to build from. That led us to the acquisition of Continental Life, a quality Medicare supplement provider with excellent distribution, sound risk management and good profitability. This is a nice complementary acquisition that will more than double our current Medicare supplement business, give it access to 4200 independent agents, provide a good operating platform for expansion and be immediately accretive.

Turning to retirement income we are building tremendous momentum in the income distribution space. For individuals we've created products that give people a guaranteed paycheck they can't outlive with upside. Overall sales of retail income distribution series products almost doubled in 2005 and we expect similar growth in 2006. We have learned that in this market consumer needs differ considerably based on age. We used this insight in 2005 to add products across a full range of income needs and we have had great success.

The Retirement Answer product and rider with an average age of purchasers being right around 46 years old grew 25% in the fourth quarter. Our income series products for consumers in or near retirement more than tripled reaching $134 million in the fourth quarter with sales clearly benefiting from the introduction of our GMWB for life product in October. We also identified the need for a product in the group market where pensions are disappearing. We continue to generate great excitement around ClearCourse. ClearCourse is a 401(k) investment only option that allows a planned participant to buy layers of guaranteed retirement income with upside in a separate account.

This product was just launched in September and interest and activity continues to ramp up. We market the product to benefit consultants, recordkeepers and plan sponsors. Since launch more than 40 potential plan sponsors representing nearly 500,000 employees and over $20 billion in retirement assets, have expressed interest in talking with us. And we are getting favorable response from recordkeepers and pension consultants as well.

This quarter we reached agreement with our first two major external clients representing 20,000 employees and $700 million in retirement assets. These two employers are in the process of putting in place rollout plans to their employees. We expect to announce them shortly and to see sales by the second quarter. We are also excited about the opportunities in the managed money space where mutual fund and temporary account wrap assets under management, are expected to reach 1.4 trillion by 2008.

In 2005 our assets under management grew 30% to more than $5 billion and we see this market becoming a larger focal point as we look to grow the business organically or through selective acquisitions. In Mortgage Insurance our global footprint is expanding led by favorable demographics and support of local policy. Let me outline some full-year highlights. International earnings grew 33% for the year, driven by strong business performance in Canada, Australia and Europe. As Tom Mann told you last quarter Canada makes up just over half our international Mortgage Insurance income, Australia is about 40% and Europe is coming along nicely though it remains less than 10%. The unearned premium reserve grew 20% in 2005 to more than $1.8 billion at year end. International insurance in force was up 27%, international new insurance written was up 52% led by Australia where we have increased our penetration in the flow market and as you will recall, completed several prime bulk transactions. In Europe, NIW nearly doubled as we are now hitting the three to five-year stage of doing business in several countries.

We also started writing business in Mexico in the fourth quarter through reinsurance with housing authorities. Stepping back we have delivered on our strategy to expand our global footprint beyond our established platforms in Australia and Canada. We have a strong pipeline for high return growth in international Mortgage Insurance and we will continue to expand into new markets.

I'm also pleased with the turnaround in the U.S. Mortgage Insurance business following the strategy we laid out at the beginning of 2005. We increased our penetration in new lender channels using focused service and product innovations; we saw full year flow NIW growth of 3%, and we have seen our share of the U.S. MI market increase for the sixth consecutive quarter. Our HomeOpeners product suite is gaining broad acceptance and we are encouraged by the growing willingness of financial institutions, brokers and consumers to consider Mortgage Insurance versus simultaneous second mortgages.

Finally persistency moved up to 68% in the fourth quarter. Looking at portfolio quality we continue to benefit from managing risk through dispersion by geography, lender and product type. With an average loan size that remains under $130,000. Now we did see a seasonal increase in the fourth quarter delinquencies just as we said we would. Because at this time of year consumers tend to be most likely to let a mortgage payment slip behind. I know we didn't see this trend a year ago for the first time in a long time, but in 2005 we did see this historical trend return with an increase in our fourth-quarter loss ratio to 40% excluding severely impacted hurricane areas.

Turning to hurricane exposure we put out about $3 million after-tax in reserves for delinquencies in severely impacted areas after a very extensive analysis. So in all we see a positive picture emerging in the U.S. Mortgage Insurance business with a path to return this business to a 15% ROE over the next five years as we execute our growth strategy and free up capital.

One final topic and that's around our brand efforts. Our brand launch has been remarkable in the first 18 months, awareness among producers now is near 70%. We are so pleased with our progress and the sell down of GE ownership and we now plan to drop the tagline built on GE heritage from our logo in the first half of this year. You'll see our new tagline and ad campaign later this spring.

Wrapping up we expect to make continued progress in our operating ROE expansion in 2006. Right now we see 2006 ROE approaching 11%. We would have to see a significant acquisition to change that outlook at this point. So with that let me now turn it over to Rick to give you some financial details on the quarter.

Thanks, Mike, and good morning everyone. 2005 was a great year for the Company. We had over 1.2 billion of operating earnings for the full year, up 18% and representing $2.52 of operating earnings per diluted share. At December's Investor Day we expected earnings of between $2.40 and $2.50 per share for 2005, but during the quarter we had $0.04 of favorability from a reserve adjustment in our mortgage loan portfolio that put us above that range. Similarly the $0.04 also improved our quarterly operating earnings results of $0.62. $0.58 represents the underlying results in the quarter and was consistent with our expectation for normal U.S. mortgage seasoning. With that backdrop let me take you through the fourth-quarter highlights.

All three operating segments performed well this quarter with the mortgage and retirement income segments delivering double-digit growth followed closely by protection at 9% growth. Beginning with the topline in our premium based products our underlying earned premiums were up 7% with good progress in many of our products. This excludes the impact of lower life contingent annuity sales and the payor and protection runoff we discussed before. On a reported basis premiums were down 5%.

Life premiums grew 8% from our competitive pricing and expanded distribution. This growth along with favorable term mortality this year relative to unfavorable term mortality last year contributed to positive earnings results for life up 18%. Our Long-term care book continues to expand with earned premiums up 8% over the prior year quarter despite relatively flat sales for Genworth. Countering this growth was pressure as in previous quarters from lower terminations in our older blocks and yields. Overall interest adjusted loss ratios remain within our pricing range.

Turning to core Payment Protection, earned premiums grew 7% this quarter excluding unfavorable foreign exchange. From a margin perspective combined ratios are running in the mid '90s consistent with performance over the past several quarters. International Mortgage Insurance premiums grew at 10% from an inforce seasoning and new sales. This excludes any unfavorable foreign exchange. Losses continue to run in the mid teens so we expect this will increase as the book seasons.

In the U.S. Mortgage Insurance this fourth-quarter underlying loss ratio was 40%, right in line with expectations. Going back to our discussion at Investor Day, unlike the fourth quarter of 2004 when we had favorable delinquency performance, in the current quarter we expected and incurred a nominal seasonal increase in delinquencies. This resulted in the $7 million after-tax increase to reserves which was offset by $3 million of after-tax lower paid claims. We also had higher delinquencies in areas severely impacted by hurricanes and increased reserves an additional $3 million after tax bringing the fourth-quarter reported loss ratio to 45% and the full year loss ratio to 26%. Looking ahead we expect this ratio to climb slightly as in 2004 and 2005 books continue to season, ending 2006 in the 30% range.

Shifting gears to net investment income and our asset based product margins, quarterly net investment income of 941 million increased 14% yielding 5.8%. Our portfolio yields continue to see favorability and affording rate assets as the short end of the curve rose approximately 200 basis points. I'll remind you that as we half have mashed floating-rate liabilities this favorability does not flow through to the bottom line. Total invested assets grew 5% year-over-year with good growth across the segments. Beyond the positive volume lift we are seeing consistent spread expansion of a few basis points each quarter in our retirement income segment. This is coming not from higher yields in the portfolio but as we reset contract crediting rates to current market levels.

During the current quarter we reset rates on over 300 million of liabilities with the bulk of that in our low ROE high guaranteed rate blocks. This is just one of the ways we are working to proactively manage the return on our capital. Net investment income results in the quarter were also affected by a couple of unusual items. First, we adjusted the reserving process in related accounting for estimating losses in our commercial mortgage loan portfolio. After review of our underwriting parameters and risk factors we lowered the loan loss reserves by $19 million after DAC and taxes. This adjustment reflects our historically low loss experience in a very high-quality portfolio.

Next we reported a favorable impact of $6 million after-tax to investment income related to non qualifying hedges under FAS 133. These two items, with a combined impact of $25 million after-tax were predominantly in our spread-based retail line. During the quarter we also had $5 million of after-tax investment income due to net bond calls and $6 million of after-tax investment income from partnership earnings. Both of these amounts are comparable to last year and not a driver of year-over-year variance.

Adjusting for these items underlying yield was 5.4%. Looking ahead to 2006 we expect treasury rates to gradually rise and credit spreads to remain tight. In terms of impact to our portfolio with new money being put to work at close to our portfolio rate we expect underlying yields to be flat excluding the bond call and prepayment lift from 2005. Two final points as regards to interest rates. Mortgage Insurance persistency is seeing some positive signs. Thirty-year mortgage rates are up over 6% and correspondingly so is our persistency which increased from 59% in the third quarter to 68% in the fourth quarter. We were pleased to see this improvement and for 2006 we expect this level to be stable.

Secondly we see an ongoing impact from the flat yield curve in our traditional fixed annuity business. With the average one-year CD rate remaining above 4%, sales of this product were challenged in the quarter. We expect sales levels to reflect this going forward as we maintain our pricing discipline.

Overall expenses or on track. Adjusting for the payor and protection business due to its business mix our underlying expense revenue ratio for the year was 13.8%, slightly better than our outlook at Investor Day. We are pleased to have absorbed new public company costs this year while also still investing significantly for future growth. In 2006 the expense ratio will improve to around 13% and importantly we will continue to fund growth. In terms of the effective tax rate we reached our goal and lowered the overall rate by 1 full point ending at 32% for the year. We expect progress will continue in 2006 with an additional 1 to 2 percentage point reduction.

Moving to capital, Genworth was clearly focused on efficient capital management during 2005. Let me recap the highlights. In March we executed a 500 million share repurchase and a block transaction with GE. In the quarter we announced a 750 million, 18 month share repurchase program with flexibility for both open market and block transactions as GE has stated its intent to sell down in 2006. We committed 145 million of capital capacity for the acquisition of Continental Life, accretive to earnings in 2006. We raised our common shareholder dividend by 15% and ended the year at 1.5 billion of deployable capital capacity. As we think about capital deployment for 2006 we see more of the same. We will continue to drive organic growth both with higher margin sales and with a focus on enhancing margins in low return blocks. This will be supplemented by growth from targeted acquisitions when they fit our profile.

Beyond growth initiatives that put capital to work, we have built into our 2006 plans 500 million of share repurchase and maintain flexibility to do more as the year plays out. And finally we will look at our dividends periodically. Let me take a few minutes to recap on where I see the segment performance headed for 2006. For Protection we expect solid growth of 9 to 11% in 2006 led by double-digit performance in Life, Payment Protection and Group. These platforms have clear strategies for product and distribution expansion for new country development.

In Long-term care over the past several quarters we have been talking about three areas that we are monitoring for signs of return, a tough investment environment, low older block terminations and a challenging market for sales. For investments we do not see any material improvement here in 2006. For termination rates we anticipate stable to slight improvement in 2006. And lastly on the sales front, we will be adding higher margin business, and as Mike mentioned, sentiments are turning positive in the marketplace. And we expect to see sales progress in 2006.

These three factors along with the partial year benefits of the Continental Life acquisition will maintain flat earnings in 2006. Retirement income and investments will see continued progress in its growth agenda in 2006 expanding its new capabilities in new areas like group income and registered notes. Assets under management will grow to double-digit rate in total primarily from a 50 plus percent on the managed money side, but also with close to 10% in our spread-based lines. As I mentioned earlier, spreads have widened and this will continue in 2006 as we reset crediting rates.

In Mortgage the international platforms anticipate a solid 2006. The growth agenda for new countries, products and service initiatives positions them well for sales performance. The unearned premium reserve now stands at 1.8 billion and will continue into revenues over the next five to eight years as losses also season. Overall 2006 earnings is expected in the high teens.

Turning to the U.S. Mortgage Insurance segment, Mike already discussed sales, and a second critical factor in 2006 for this line is persistency. We see a stable to modestly improving level off of fourth quarter for 2006. This should enable our insurance in force to grow in 2006 for the first time in multiple years.

And lastly in the corporate segment our underlying fourth-quarter results were right in line with our expectations at $30 million and we expect that to continue through 2006. So to wrap this up let me reiterate where we are for 2006. Our outlook for operating earnings remains consistent with Investor Day at between $2.65 and $2.75 per diluted share. Operating return on equity at the end of 2006 will be closing in on 11%. If you look back at our ending 2004 equity of 9.8% this equates to a two-year increase of more than 100 basis points in total or 50 basis points on average. We were very positive about that progression.

And with that I will turn it back to Jean to start the Q&A.

Thank you, Rick, and operator we are ready to begin the question and answer session.

(OPERATOR INSTRUCTIONS) Tamara Kravec of Banc of America Securities.

(inaudible)

Jason Zucker of Fox-Pitt, Kelton.

Good morning and thank you. A couple of questions, Rick, if I could just go back to you. Could you summarize for us if at all anything has changed since Investor Day with respect to your outlook? Obviously not including the Continental acquisition?

Sure, certainly. I think if you look back to Investor Day I would say that nothing really has changed. As we looked at the year at Investor Day we still reiterate our 240 to 250, the mortgage loan reserve which release which we discussed did come in. We exceeded that range but excluding that item I think our earnings progression that we talked about at Investor Day as well as our ROE progression still remain very much intact.

If I could just turn to Long-term Care. Sales were strong this quarter, a bit of a breakout. Could you give us some more color as to why and then given your comments around the improved sales outlook why not raise your sales guidance that you gave us back at Investor Day which I think was about 0 to 5%?

If you peel the onion on the fourth-quarter sales for LTC which you saw is a nice bump on the Group LTC products which we felt pretty good about, but frankly that is a nonrecurring item. If you look at the Long-term Care individual product we saw another quarter of stable sales. But we are pretty pleased with that performance on a number of fronts. First off the market continues to be soft, so a flat sales performance means we continue for another quarter to pick up share. We are also making positive progress on a number of fronts. We've got three-quarters of sequential submitted growth through our independent channels. If you look at our career sales force, the top 100 agents their sales for the year were up 18%, we had a great recruiting year with new agents and sales from brand new agents was up 78%. I look at that and go if the top guys are selling more and we are recruiting into the business more agents that bodes well for the future of the business.

Our challenge on the career side is the middle of the pack where we are just not getting the agent productivity that we expected. Our agent training is making a big difference. We have now todate trained 11,000 agents on the art of Long-term Care and we are seeing some nice sales pick up with those agents after those training classes.

And then lastly on med supp, what do you think the returns are that you can attain in the med sup business? And then I just wanted to follow up with a comment that you'd made that now that you have an operating platform you could use it to expand on. Is this someplace that we should be thinking that you are now more interested in acquiring into?

Actually we expect returns in the midteens from the acquisition in our med supp line in general. It is a very, very strong operating platform that Continental Life has, very good agent loyalty, very good pricing and underwriting disciplines which are the key to profitability in that industry. And you see that come through in that company in terms of its loss ratio performance and its persistency and its sales growth. What we expect to do and what we are planning to do once we close the acquisition is to take our existing med supp capabilities that we have in Richmond and move it to Brentwood, Tennessee and build upon that operating platform in the senior market. That is a combination of our strength in Long-term care Insurance, our universal older age product which is doing well, med supp is a core offering there and we are looking at other senior market product opportunities that we can leverage through that Continental Life platform.

Thank you.

Bob Glasspiegel of Langen McAlenney.

One quick follow-up on Jason's question. What is the landscape for med supp right now from a macro environment? And do you have a participation in the Part D products that are getting rolled out in that market?

Here is the way we look at the landscape. Med supp is an extremely valuable product for seniors over the age of 65. Today, 1 in 4 seniors over the age of 65 has med supp insurance. So I think it speaks to the viability of the product. There are two dynamics going on within that age group. One is the introduction of Part D. We have virtually no exposure to that with respect to Continental Life because they have zero exposure to the med supp plans H, I & J which include drug coverage, so we feel pretty good about that.

The other dynamic going on is the marketing and subsidization with Medicare Advantage that is going on out there, and we think that will be a temporary distraction as the marketing and the subsidies increase as they had in the late '90s. We think there will be a distraction, but after the '90s experience, that market came right back down. We feel pretty good about that.

The other opportunity with Medicare Advantage is it does create gaps for consumers that we could fill with other product solutions.

Torchmark, which is a well-respected long-term player in that market that many of us follow has been contracting in that business, having trouble growing it; arguing that there have been a few overzealous players in that market that have been under pricing the product. You would disagree with that perspective, or do you think it's maybe just -- you're getting in at a cyclical low and pricing could improve?

I think it is a very fragmented market, and I think within any fragmented market you're going to have disciplined players and you're going to have some undisciplined players. Like many of our other product lines, we're going to continue to main -- as Continental life has done -- over 20 plus years maintaining their pricing and underwriting disciplines. And we've seen that company continue to grow in a tough environment. So we're going to stick to that knitting, which is a consistent story with some of our other product lines like life and long-term care.

Thank you very much.

Nigel Dally with Morgan Stanley.

Good morning. (indiscernible) Long-term Care, the earnings there continue to be diversified by policyholder terminations, is that a factor you expect to continue? And if so how should we think about the risk of a reserve charge? Second on the term life, clearly very strong growth. But we are continuing to see more and more companies come up with capital market solutions for triple (indiscernible) prime rates. Is this beginning to have any impact on competition and if more generally how long do you expect that to maintain your pricing advantage in that product?

Nigel, this is Mike. Just two views as Rick said we expect terminations to remain about where they've been; we'll look for some signs of (technical difficulty) improvement. But we think we've certainly have our reserves in line on that front. Again the pressures we see go back is we've lost the growth rate that we thought we'd see over the past two years, that certainly created pressure, the investment pressure and then as you point out the terminations particularly on the older block. The capital markets impact in term life, let me turn that over to George.

(technical difficulty) and you've got four or five companies including ourselves that are clearly the most competitive with respect to price and not a lot of differentiation among them. Which means that now we get to compete on levers other than price. You know that we added 60 new distributors in life insurance in 2005; we think as we grow our penetration with them in '06 that will help us increase our sales. We continue to upgrade our service and we continue to introduce new products. Our return of premium term product is getting off to a pretty good start at this point; it is very early. And we are introducing the first enhancement to that line on Monday, a non-med simplified issue mortgage only product. We think pulling those multiple levers will continue to drive the growth rate of our term life business in a more level playing field pricing environment.

(OPERATOR INSTRUCTIONS) Jamminder Bhullar of JPMorgan.

I just have a couple of questions. First, Mike, could you discuss the M&A environment? We saw the Continental deal but which businesses do you see an opportunity or a need in over the next year? And then second on spreads could you just discuss how much flexibility you have on lowering crediting rates more in your retirement income business if interest rates remain low? And that is it.

Let me start with the M&A and then I will hand it off to either Rick or Pam on the spreads. On the M&A environment it's a challenging environment. There is a lot of players with excess capital out there competing to redeploy that capital. So that is just the reality that I think is out there. That being said we're certainly trying to build up some of our capabilities in the retirement business area. We focus, for example and I mentioned in my comments about the managed money area and the intersection of managed money with income we think is an attractive area to focus on.

Secondly we have looked for add-ons in Protection, you saw an example of that, though the other add-ons we've looked at are more akin to block transactions. And we've looked at block transactions, we are just very disciplined in looking at them, make sure that we like the returns that are possible and make sure that the execution of any integration related with a block makes sense versus all of the energy and progress and momentum we have on the core growth front. You don't want to disrupt that.

We will continue to look at in the mortgage insurance at anything that's an opportunity outside the U.S. I think we have the position we want and we are building selectively within the U.S. But those would be three perspectives cutting across the segments. Let me turn it over to you. Rick, you want to hit the spreads?

Yes. The second part in terms of flexibility that we have out there, I'd put two metrics (technical difficulty) relative to what we have, if you look at it about 60% of our book today is (technical difficulty) book that (technical difficulty) average spreads of those floors is around the 80 (technical difficulty) levels (technical difficulty) environment around them books of business in terms of for everyone to establish those crediting rates at. So as I mentioned we have spreads have improved from lower crediting rates mainly from items coming off of a higher guaranteed level. And we will continue to take those to current market levels.

Okay, thank you.

Steven Schwartz, Raymond James & Associates.

Rick, I'm going to apologize but you were fading in and out at least on my phone. Could you just repeat what Jimmy said before we get to or what you just answered Jimmy before we get to their questions?

Certainly. I gave him two metrics with some other qualitative aspects to it. But those two metrics are 60% of our book of business currently at the floors with about 80 basis points of crediting room to the floors.

So 60% of the book is at floors or?

Correct.

And the remaining has 80 bits to the floors. If we can touch quickly again on LTC, I'm a little bit confused. Has the State Partnership program legislation passed both houses or not?

(technical difficulty) also passed but the Senate had a technical provision that changed, that then makes it go back to the House so the House since the one thing was stripped out elsewhere in the Bill, the House has to reapprove that but they won't get together until they reconvene after the 31st.

Okay.

That is why there has been a good support but there is one more step and anything can happen in Washington.

Sure. As well I've heard but haven't seen so maybe you can confirm. Was there anything done to limit the ability of spending down in order to qualify for Medicaid?

What it has done was two things, you basically get dollar for dollar credit for the benefits that are provided by the policy. The thing you're referring to is that the look-back period was extended from three to five years where they look to see did somebody purposefully deplete their assets, transfer them to others as part of sort of a Medicaid claw back and there are some other loopholes that were closed.

Okay, and that was both in the Senate and House.

Yes.

Another quick question for Rick. A couple of times in the press releases taxes were mentioned. I think one in corporate, in other 8 million was mentioned. I forget which other division but it was a $4 million amount. Where those kind of non trendables, Rick?

I think if you look, one, we like to keep taxes at the overall levels so when we look at the overall tax rate of 32% we are happy with that. But specifically for the quarter in our disclosure there was favorability in the mortgage business of $4 million; trendable or not I really wouldn't dissect it that much at the mortgage business line. Certainly at a corporate level we did increase taxes higher than our expectations by in tax contingencies that we put up in the fourth quarter. That one is clearly a non trendable. Within the segments we don't get into trendable and non-trendable within the quarters as they do move.

Great, thank you very much.

Ed Spehar from Merrill Lynch.

I've got a couple of questions. Mike, I was wondering if maybe you could give us some definition of what you think of when you say a significant acquisition. You made the comment about ROE and what it would take to move it beyond the target that you have. And I think related to that question would be, Rick, you mentioned that there was some flexibility to do more share repo as the year plays out. I'm wondering if you could help us with the just sort of what are the developments that would occur that would lead you to do more in terms of share repurchase and any color on how much more you'd be willing to do? I mean clearly the excess capital is something that would be higher than the 500 million that you've built into your plan. Thanks.

This is Mike, great questions, two perspectives on it. First again I will remind you and you know well we have multiple levers to drive ROE. And I think that is a real strength. The core growth again, the runoff and focus on improving returns in the older book of business that Rick touched upon, redeployment of capital while we stay on the expense side, very focused as well as work on investment returns on a multiyear basis. At Investor Day we said that we had baked in doing some acquisitions of a few hundred million dollars, so when I say significant you would probably have to break one billion to give you an order of magnitude. And when we focused on our nice acquisitions that are complementary to the segments we are in because we know we can execute and build core growth off of and we certainly looked for the accretion along with those.

We had some flexibility as we announced the 750 but we have 500 specifically in our plans. We will have to see how capital redeployment goes through the year because we also want to take a look at dividends as well. And we will gauge whether we move off that 500 based on how other opportunities of core growth are going, how the acquisition environment plays out, when we take a look at dividends later this year. And it's a good book end for you.

Thank you.

Stewart Johnson of Friedman, Billings, Ramsey.

I'd like to go back to comments you made about the product you launched in September, ClearCourse. And maybe talk about how you expect the potential accounts that you mentioned, I think you said 40 might roll out through the remainder of the year. It sounds like two major employers are kind of in the queue. Can you talk about the potential for assets under management? It sounds like it is a pretty decent opportunity but how that might play into earnings going forward? Thanks.

I'm going to give that to Pam Schutz, great question.

As you know we just launched the product and formally launched it in September. And we've been very pleased with the response so far. Our strategy is we are marketing to direct plan sponsors as well as recordkeepers and consultants. We have signed up two plan sponsors with $700 million of retirement assets and 20,000 employees. And so we feel very good about the quick ramp.

As Mike mentioned we have a very strong pipeline of sponsors who have expressed interest in the product. In terms of how this will play out, as we laid out at Investor Day we see roughly 300 million in assets under management in the first year growing to roughly $7 billion over a period of time the next several years. This is a startup and a ramp but we are very positive about the growth in it.

Great. Are the employees that you are going to be working with these two major employers, do they have any relationship with the Company now?

With our company?

Right.

No.

Great, thanks.

(OPERATOR INSTRUCTIONS) Mark Finkelstein of Cochran, Caronia Securities.

I wanted to go back to the Long-term Care partnerships real quick; assuming this is passed. How do you see the timeframe for states rolling out programs and potentially impacting sales? And secondly can you compare your sales levels in the four states and growth levels in the four states that have the programs to those that don't?

Mark, this is George Zippel. In terms of the timing here is the way we see it playing out. If the House does pass it when they come back in session after the 31st of this month, we expect that the President will sign the Bill. And then each one of the states will have to basically apply to enact the partnership program. In order to do that they will need to have legislative approval in their states, there are several dozen states that have already passed the enabling legislation. So we think we will get off to a fast start in terms of the filing and the ramp up in '06 but we don't expect to see any material sales impact for the industry probably until the '07 timeframe.

There is a couple of kind of intangibles that may benefit in the '06 timeframe and that is by this Bill being passed and being rolled out in the states there will be an implied public support of the private LTC as a solution to Long-term care expenses. And we think that will benefit the industry. But again we don't expect to see any tangible sales impact until the '07 timeframe.

And just is there any way you can kind of talk about the impact on sales and sales growth in the four states that actually have programs relative to those that don't?

Yes, I'm sorry, I should have picked that one up. Based on the studies that we've done analyzing our sales over the past five years in the four partnership states versus the non four partnership states, partnership states sales have been about 8% higher than non partnership states so it is a material difference. Consumers do see the value in the partnership product.

Perfect. I think I missed the answer to Bob's question, are you taking any risk on Part D whether it's through kind of a partnership program or is it purely a fee business?

No, we are not underwriting any Medicare Part D. What we are doing is we are distributing Part D, leveraging the products of a couple of partners. We have one and our friends at Continental Life have another partner. But we are simply just reselling their product.

So you are not taking any premium on the reinsurance side of that?

No, sir.

Perfect. Thank you.

Robert Ryan of Merrill Lynch.

Could you break out for us what portion of the delinquency inventory related to the hurricane affected areas?

Sure, Rob, this is Tom. Let me start with the total increase that we had in the United States in the fourth quarter which was about 2900. As Mike mentioned earlier and Rick also, we had about a 1300 increase out of that 2900 in the severely impacted areas primarily related to Hurricane Katrina. And the delta of the 2900, 1300 or the 1600 if my math is correct, that was really across the nation although there was a bit of an impact in the broader designated FEMA areas as well. But pretty tough to decide if that is hurricane or seasonality but clearly there was a little bit of a hurricane impact in that additional 1600 as well.

Looking back at 2005, what was it that contributed to overall, a year-over-year decrease for the delinquency inventory even given the increase in the fourth quarter, it's down from year end 2004?

Sure, you are right. If you back out the hurricane impacted areas you do see that decrease. Really two reasons, first is we did have a decline of reinsurance inforce levels year-over-year, that would be the first reason. And secondly as we've had that decline it came in our older books and we've replaced it with a very strong new insurance written year this year. But that is in its early delinquency timeframe if you will. We have a younger book which tends to have -- we have a smaller book number one, and secondly we have a younger book, Rob.

Is there anything in your claim inventory currently that would suggest 2006 claim payments that are substantially different from the run rate suggested by the fourth-quarter amount?

In fact, Rob, prehurricane we would have anticipated that our claim payments next year would have been down. I still think we have a chance they will be down in 2006 although when I factor back in the reserving that we did in the potential for claims in the hurricane related area we are going to be closer to flat. But we might be a little bit below in 2006 compared to 2005.

Did you have delinquency inventory effect as of September 30th related to the hurricanes, like a comparable number to that 1300? And would you expect that to increase further or perhaps decrease as some of those delinquencies are resolved?

It would be my view that we did not have an impact on our delinquencies from the hurricanes in the third quarter because those frequencies had not been reported to us yet. And usually were reported, our reporting begins at two payments past due. So, no, I do not view that we did have that. I do not see a further increase in our delinquencies related to the hurricanes. Now never say never but that would be my directional comment to you. In fact we saw a nominal decrease in our delinquencies from November to December in the severely impacted areas. I think we've seen the top of it. Again I would remind us all that that was an unprecedented event in the Louisiana, Mississippi area. And so while I'm reasonably comfortable with my comments to you that we really do need to see this thing play out, Rob. But I think we are on the downside of it.

And just for clarification, that the after-tax reserve of 3 million, so on the balance sheet there is a $5 million loss reserve related to hurricane affected areas for U.S. MI?

That is exactly right but one caveat, as related to the severely impacted areas, the additional there is a -- I could suggest to you that we have another $1 to $2 million of reserves that were for the broader FEMA area as well. We did see a higher increase in our seasonal delinquencies in those areas; certainly not to the degree that we saw in the New Orleans area. So I would say on a pre-tax basis I would arrange it from 5 to $7 million related to the hurricanes.

Thank you very much.

That concludes our Q&A session for today; I'd like to turn the call back over to our speakers for any closing remarks they may have.

Thanks Rob for getting us Mortgage Insurance section to our call, with that we will end the call and talk to you as the quarter goes on. Thanks everyone.

Ladies and gentlemen, this concludes Genworth Financial's fourth-quarter 2005 earnings call. Thank you for your participation, at this time the call will conclude. Have a good day.