Genworth Financial Inc (GNW) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you for your patience and welcome to Genworth Financial's first-quarter 2006 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 a replay purposes. Also, we ask that you refrain from using cellphones, speakerphones, or headsets during the Q&A portion of today's call.

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

Thank you, operator. Welcome, everyone, to our first-quarter 2006 earnings conference call.

As you know, our press release and financial settlement are posted on our Web site. This morning, our CEO, Mike Fraizer, will discuss highlights of operations and CFO Rick McKenney will take you through the quarter's earnings. Also on hand for the call are the leaders of our three business segments, Tom Mann, President and CEO of Mortgage Insurance, Pam Schutz, President and CEO of Retirement Income and Investments, and George Zippel, President and CEO of Protection.

In regards to forward-looking statement and the use of non-GAAP financial information, as always, elements of our comments today are forward-looking and are based on management's best view of the world and our business 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 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, these measures have been reconciled to GAAP where required in accordance with SEC rules.

I would also like to remind everyone that on May 18, we will hold our spring 2006 strategic update for investors at the Hotel Parker Meridien in New York. Genworth's senior management team will provide an update on key business strategies and key growth initiatives. You should have received an invitation to this event with additional information. Then, later in the year, as we had announced earlier, December 5, we will be hosting a meeting to review and present our outlook for 2007.

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

Thanks, Jean, and good morning.

Genworth is off to a good start in 2006. We are executing on key growth strategies across product, distribution, and service initiatives and are delivering broad-based earnings expansion. We continue to redeploy excess capital with a nearly $500 million per share repurchase as our former majority shareholder sold its remaining position. Now, this represents our second major repurchase since going public. We are forging a path in 2006 to expand market penetration and generate sound growth. Our first-quarter did just that. Each of our growth businesses delivered solid results and we demonstrated progress in expanding sales in long-term care and U.S. Mortgage Insurance.

I'll spend the next few moments on gross highlights from the quarter and share a few perspectives on key market factors. Rick will then recap earnings.

Let's begin with protection, where term life sales were up 17% from prior year. Sequentially, term life sales dipped a bit off a strong fourth quarter, where we saw a year-end push by distributors. We have seen some competitors becoming more aggressive on pricing, but we remain well positioned with competitive products, growing distribution reach and ongoing service initiatives. We have a solid pipeline on term business that we believe will enable us to deliver midteens sales growth for the year. We're also very pleased with our initial success in the high-growth return of premium term market. During the quarter, we launched MasterKey, a return of premium product with simplified underwriting designed for people who have recently obtained a mortgage. Finally, universal life sales were strong in the quarter with annual deposits up nearly 30% and again, we have a good new business pipeline in place.

Turning to long-term care, sales have begun to show a glimmer of the long-awaited improvement. Individual LTC sales were up 8% from both prior years and sequentially. This was driven by sales from independent channels of 27 million. This would be up 17% versus the prior year and 13% sequentially. We are pleased that the long-term care state partnership legislation that has clear public policy benefits was passed at the federal level this quarter. We're at the forefront of working with states to implement these programs, which we believe will add further momentum to sales over time.

Our net subsales more than doubled to $7 million as we are seeing increased activity related to Medicare Part D, which raised overall supplementary product awareness.

Finally, we launched Total Living Coverage, the first of our linked-benefit products which combines long-term care and universal life insurance. We're optimistic about the potential here.

Payment protection sales continue to reflect our mix shift strategy. On Continental Europe, sales were strong, up 17% adjusted for unfavorable foreign exchange. We did have disappointing results in the UK where two large clients had significantly lower volume. This was unexpected. We anticipate growing payment protection through additional distribution channels in the UK, which should lead to overall sales growth returning by the second half of the year. In all, we're seeing nice momentum the multiple protection distribution channels and markets -- term and universal life, long-term care and independent channels, Medicare supplements, and payment protection insurance on the European continent.

We're also excited about how our strategies are unfolding in retirement income. We're gaining momentum with income distribution solutions for both individuals and groups. Sales of our retail income distribution series products tripled over the prior-year quarter led by sales of the GNWB for life product introduced late last year. We're also giving up for enrollment of employees for the first two major customers of our group retirement income product ClearCourse. ClearCourse is a 401(k) investment only option that enables plan participants to buy layers of guaranteed retirement income with the potential for upside in a separate account. This product is entirely compatible with traditional 401(k) investment options. In addition, our pipeline of potential clients for ClearCourse has continued to expand as more people understand the value proposition. So, our plans for the group income market are on track.

We had good growth again in managed money from a combination of strong product offerings, increased wholesaler support, and the expansion of reps. Managed money assets were up 44% over the past year and now stand at more than $5.8 billion.

Turning to Mortgage Insurance, we saw strong performance in both our international and U.S. platforms. International new insurance written was up 43%. Canada was up 21%, driven by a slightly larger market and deeper account penetration. Europe more than doubled from customer acquisitions and penetration. Australia reported a 35% increase in NIW, but that was primarily related to customer reporting delays. The Australian market growth has slow and slow NIW sales were essentially flat versus the prior year. We still anticipate seeing growth in the Australian market driven by an increase in first-time home buyers and an expansion in high loan-to-value lending.

Shifting direction, we continue to be very pleased with progress across our U.S. Mortgage Insurance business as we position it for growth and higher returns. U.S. NIW was up 21% to 6.8 billion in the quarter. Our flow business grew 11%, while we estimate that the market size actually declined. In addition, our prime bulk business NIW nearly doubled to 1.3 billion. We believe we achieved our seventh consecutive quarter of share gains in the sales of [flow] Mortgage Insurance, a testament to our repositioning efforts as we penetrate a broader set of distribution channels and gain traction with new product offerings.

Our HomeOpeners product suite is helping lead growth across key customer segments and now represents more than 15% of our flow NIW versus 4% a year ago.

Looking at the overall mortgage market, we, along with others in the industry, continue to educate lenders, influencers, regulators, and customers about the value of a fixed-rate mortgage with Mortgage Insurance in terms of safety, consistency, and affordability. While the education efforts will take time, we're seeing encouraging signs that simultaneous second mortgage market penetration has peaked and is actually showing signs of a potential decline. So we are cautiously optimistic that Mortgage Insurance will begin to gain share of the overall purchase market during this year.

One final topic and that is around our brand efforts. As you will see on the cover of our financial supplement, we have rolled out our new brand tagline "Insurance for Living, Solutions for Life". This was the first step in the Next Generation branding efforts that will really pick up later this year and has been well-received. So we are executing well on multiple fronts and feel good about how Genworth is positioned. Given it is early in the year, we are maintaining our full-year earnings outlook with Rick providing specifics in just a moment.

With that, let me turn it over to Rick McKenney to give you some financial details on the quarter. Rick?

Thanks, Mike, and good morning, everyone.

Genworth delivered $345 million of net operating earnings or $0.72 of earnings per diluted share in the first quarter. This represents 9% EPS growth over last year. We're pleased with how the business performed and it bodes well for the total year. Underlying our quarterly earnings, we see a run rate of $0.66 $0.0 $0.67 after adjusting for favorable investment items, reserve refinements and expense timing. So, at this early stage of the year, we are maintaining our outlook of between $2.65 and $2.75 of operating earnings per share in and around an 11% operating ROE.

Before moving to the operating segments, I would like to mention that we have expanded our financial supplement in conjunction with the new year to include more disclosure in the protection segment sales and international Mortgage Insurance.

Let's go to the segment results where I'll provide my perspectives on growth, losses, and overall margins and returns. Beginning of protection, we're pleased with the progress that both term and universal life are making on their growth agendas. You can see that coming through in the life premium line, where we grew a solid 10% over last year. Term mortality is right on track, slightly favorable to both last year and to pricing assumptions. We have maintained our underwriting disciplines throughout the expansion of the last few years and see the positive mortality trend continuing. The topline growth and loss performance, along with our competitive cost structure, have all contributed to a 9% increase to operating earnings year-over-year.

On the long-term care front, Mike mentioned the positive signs we're seeing from a sales perspective. (indiscernible) performance, the book is growing with earned premiums up 4% over the prior year. That growth is important as it comes in our newest generation of product with midteen lifetimes ROEs. These higher-margin layers of new business, along with stable incurred claim levels, are helping to offset two areas, low t termination levels in older blocks and investment returns. Terminations in the older blocks have been stable over the past several quarters and that's good news though they remain below our original pricing assumptions. Overall, aggregate loss ratios are within our pricing ranges.

For the LTC investment portfolio, we're still feeling the pressure of cash flows going to work in a low rate environment, but it is nice to see the recent uptick in rates. In fact, we were able to reduce investment risks on some future LTC cash flows during the quarter through forward hedging. All of all, long-term care fundamentals are consistent with our expectations and we expect to bring the recently announced Medicare supplement acquisition onboard in the second quarter.

Turning to payment protection, the business is doing well on multiple fronts. Distribution expansion efforts are paying off with double-digit sales growth in continental Europe. The business continues to manage through its mix shift, running off the low margin UK block at adding higher-margin layers. Combined ratios are stable in the '90s and pretax operating margins are up more than 2 full percentage points over the first quarter of last year.

We're also seeing the impacts of our global tax strategy comes through with a lower effective tax rate giving lift to earnings. In total, the payment protection business results are a good example of managing through the runoff of a low return block by maintaining our disciplines and adding higher-margin business.

Continuing with the international platforms for a minute, the international Mortgage Insurance business continues to perform well. You've heard about the strong growth progress we are making across the platforms in terms of expanding distribution and penetrating our existing customer base. We see this in both earned premiums that are up more than 25% year-over-year and in unearned premium reserves that now stands at 1.9 billion to be earned primarily over the next ten years. We see generally favorable economic environments across our platforms. Mortgage origination levels are stable in Canada and Australia and growing overall in Europe. Globally, home price appreciation has moderated and will be flat to slightly up. Overall unemployment rates remain stable in the single digits.

So let me put each platform's performance in context. Canada and Europe continue the season favorably with loss ratios in the midteens. In Australia, the loss ratio this quarter was 29%. The large 2004 and 2005 books are beginning to season in an environment of minimal home price appreciation. This compares to last year when the 2003 and earlier books began to peak. Those books have significant home price appreciation built-up. The prior year also included favorable reserves for delinquency performance that contributed to a lower loss ratio. The normalized loss ratio for Australia last year was in the midteens. For the full-year, we see the consolidated international loss ratio in the low 20s. In summary, this line is off to a good start with operating earnings up 12% year-over-year.

Shifting to U.S. Mortgage Insurance, we evaluate performance in five key areas -- progress on our growth agenda, persistency, loss performance, expenses, and finally capital redeployment. On the growth front, home opener sales are strong and continue to increase as a percentage of total sales. We picked up our share of sales again in the quarter, overcoming low originations overall in the market. On persistency, we typically have seen an uptick during the first quarter as fewer households moved during the winter months. At 72% though, it was higher than both our expectations for the quarter and for the year. The impact of higher interest rates and flowing home price appreciation were contributing factors. The rise is persistency is a positive for the quarter and potentially for the year. Our current expectation is that this'll moderate some, remaining in the high 60s or perhaps even 70% range of the total year, but we will have to see how that plays out. This lift in persistency, coupled with good NIW growth, should get insurance in force growing by midyear.

Incurred losses are consistent with the prior-year quarter with a loss ratio in the midteens. We did see some shifts in terms of delinquency counts and mix compared to last year. For the full year, we expect this trend to trend up slightly to below 30%. As anticipated, our expense ratio is coming down, hitting 35% in the quarter, down 2 full percentage points year-over-year. Finally, we're getting traction capital management as we were two free trapped excess contingency reserves. We expect to release a portion during 2006 for redeployment.

In summary, this business continues to make progress and we remain focused on getting it to a 15% return on equity of the next four to five years.

A few thoughts on our retirement income an investment segment -- we're getting, on average, several basis points of spread expansion each quarter in our annuity lines. Much of this is coming from ongoing recess of contract crediting rates to current market levels. During the quarter, we reset rates on additional 350 million of liabilities with the bulk of that in our low ROE high guarantee rate blocks. I will point out that as we reset the rates on these low ROE blocks, some policies will last and depending on the mix in a given quarter, we may see a drop in net assets as we did in the current quarter. This can still be a positive story as the capital behind the low ROE business is freed up for redeployment. This spread expansion, combined strong sales in our managed money and income series products, both contributed to a good quarter for the segment.

Looking at the investment environment and the portfolio, our underlying yield, excluding the impact of (indiscernible) and prepayments, was 5.5%. It was good to see rates come up during the quarter and, as I mentioned, this helps us with yields for the insurance and annuity product lines, along with boosting persistency in U.S. mortgage.

On the flip side, we continue to see a negative impact from current short-term rates on traditional annuity sales. With the average one year CD rate standing fast about 4%, sales of these products challenged. Given our pricing disciplines, we would expect sales levels to fluctuate quarter to quarter.

Looking ahead, given today's rates and assuming one or perhaps two more quarter point moves by the Fed, it is possible for the ten-year treasury to close out above 5% on average for the year. This is certainly helpful over the long-term, but given the natural offsets across some of our product lines, we would not see a material impact, less than $0.01 of EPS.

Expenses across the Company are on track to what we set out at Investor Day. We did have some favorability in the quarter from timing of growth initiatives like branding. You'll see this come back over the course of the year, mostly in the corporate segment. Also in the corporate segment, I will note that, as part of the implementation of FAS 123R, we only recognized a 4 million net gain since we had already expensed stock options under previous accounting guidance.

Then wrapping up with capital redeployment, we executed well this quarter. As part of GE's final sell-down of Genworth, we repurchased 15 million shares in a block trade for $479 million. We are pleased to have accomplished it early in the year. We remain open to more share repurchases within our remaining 270 million program authorization, weighing that against additional core growth and acquisition opportunities. Without additional redeployment, we expect to end the year with 1.3 to $1.5 billion of excess capital capacity.

With that, I will pass it back to Jean Peters to start the question-and-answer.

Thank you, Rick. Operator, we are ready now for the question-and-answer session.

(OPERATOR INSTRUCTIONS). Eric Berg, Lehman Brothers.

Thanks and good morning to everyone. I just have one question for Rick. I'm trying to understand, still, your outlook for long-term care insurance in the context of your guidance this morning. Just to sort of develop the question further, what I mean is that you have a growing book of business as measured by earned premium sales are picking up. You've described the overall loss ratio as consistent with your expectations. I would think, if claims experience is consistent with your expectations and the premiums are growing and given the hedging that you are doing, that you would be looking for growing earnings this year, not flat earnings or am I -- is there an element to this equation that I'm missing?

No, I think the points you raised are fair in terms of how the book will perform over the year. The two items I mentioned, the termination rates, which are lower than our expectations, will cause some pressure there as well as the interest rate environment, although better, we still are reinvesting cash flows at a lower rate. So consistent with our guidance that we laid out over the course of the year, that really has not changed and you'll see a relatively flat story for the full year and you will see the acquisition hopefully coming through as well to help that. So in the macroenvironment, that is correct, a growing block, but some of the margins are -- continue to be pressured and we see that continuing going forward as well.

Thank you, Rick.

Andrew Kligerman, UBS.

Two questions -- first, on the Mortgage Insurance, the question would be around the loss ratio jumping up to 29%. I understand you see a seasonality or seasoning of the business, particularly year-over-year, but it jumped 20 to 29 sequentially. so my question would be, could you give us a sense of the trend? Then also with respect Australia in a Mortgage Insurance area, the $4 billion of reporting discrepancy, could you give a little more color around how such a big number could not have been reported in an earlier quarter?

Andrew, this is Tom. I'll actually start with your second question first. Australia is concentrated and there were some relatively large lenders. It's pretty difficult for me to answer why those reporting delays would've existed in their shops, but there were a couple of three cases there -- or really two, in fact -- where their attention to the timeliness of reporting that (indiscernible) is not as acute as our attention to that is as well. We were a little bit surprised by it because the market is slow, so we didn't pick it up, if you will. The market is slow there and again, we did not anticipate that our level of penetration had reached that particular level. But it's just -- it's a little laid back down there, if I could be honest with you. So therefore that generated that.

On the second question is one comment I would make -- you do not see the sequential changes in delinquencies internationally that you do in the U.S. So, for instance, in the U.S., you do expect that there is improvement in the first quarter, so you would not see that flowing through those loss ratios from 20 to 29.

The other asset of that is there was a couple of million dollars in claims payment in our first-quarter numbers that again, from a timing perspective, should have rolled through in the fourth quarter of last year. That would have pushed that loss ratio down to about a 25, 26% level. Again, I would attribute that to seasoning of the business. You've got to remember that the '04 and '05 books that we have there are very large books in part because of the high-level of home appreciation we had up until the point in time. Those two books have now been originated in periods of flat to moderate appreciation, as we have discussed. Therefore, as they roll through their seasoning cycle and for 2004 we're beginning to see a little bit -- we're anticipating and have anticipated that they were going to perform probably at and it will be too early to call it -- but potentially above the pricing levels that we have for them. So it's really just a seasonal flow through.

That makes a lot of sense. Then just real quickly on the long-term care, it just seems like trends are really improving from a sales standpoint. I believe, recently, you'd given guidance 0 to 5% long-term care sales growth. Do you think that's going to prove out to be too low?

Andrew, this is George. I think we're confident with the guidance that we put out there. You're right; we've seen some encouraging signs. The market remains choppy. I don't have the first-quarter market results, but I'm not optimistic they we're going to see a breakthrough in the market. We're really encouraged about what's happening in independent distribution in particular, which as you know is about 60% of our sales. We've got price parity now, kind of a level playing field out there. That channel tends to be more price sensitive and the past investments that we've made in education for the producers and wholesale of support I think is paying off. We do have some challenges with our career of sales force; we are working through those. But I think, at this point in time, it is early in the year. We're encouraged, but we will stick to the guidance that we've laid out there.

Thanks much.

Tamara Kravec, Banc of America Securities.

Good morning. My question really is on the payment protection business. I'm just trying to understand. I know you said that there were a couple of -- (technical difficulty) -- clients that pulled back. I'm curious for the reason for the pullback and whether any of this changes your outlook on the business, you know, the reason to be in it. It still seems a relatively small piece of your protection segment, so if you could just kind of revisit your thinking on that business and also the topline and maybe, in your comments, Mike, if you could tie that into what you think of overall premium growth? It seemed a little bit short this quarter and really driven by the payment protection in spread retail, but if you could tie that into your overall .com premium growth for the Company going forward. Thanks.

Let's just start with payment for protection. We feel just as good about the business as we have when we've talked to you over the past couple of years at investor day. Again, we certainly saw that strength in the continent. Not only have we gained new customers there, now we're penetrating them as far as when you activate them and we've added countries. If you go back to the UK, it was very focused. We have two customers; they had different issues on just the volumes of products they did for different reasons. We understand that and think we will regain that position over time. So I wouldn't take an untoward signal out of that, and as Rick pointed out, we've continued to see some nice margin gained there as well. So are very active on the new business front as far as new products we are introducing, activating distributions, and the same time, as George has talked about in the past, continuing country expansion.

If you look at the premium levels overall, just recall that you have got a couple of main dynamics. You've got this mix shift going on in PPI, which I think is good because, from a capital management standpoint and a strategic one -- we have seen, given the challenging interest rate environment, slower sales of life contingent single premium annuities. So that -- you are seeing that come through the line along with the same types of discipline that, you know, in the single premium deferred annuities, given the competitiveness versus bank CD products. So those have been really the two points of softness from a revenue, so we look at revenue in aggregate. We also step back from those three factors and look at the underlying core, which is showing some nice growth.

Rick, any other color on that?

The only thing I would add, Tamara, if you were even to just adjust for those two factors around the annuities as well as payment protection, you're seeing more a 6% revenue rate growth in the Company overall. So that's just on the premium line.

Okay. The spread retail, that's been running at about, on a premium earned basis, around 180, 190. Is that kind of the run rate you would expect going forward or do you think it was still just this quarter that was impacted by other factors?

I think you would have to look at what I mentioned in the annuity lines in general, which is going to be with the challenging interest rate environment, it still will see some choppiness, relative to that. So that's not an unreasonable place to look at those life contingent sales.

Okay. Then just quickly on the tax rate in the payment protection segment, is there any reason for that to be somewhat significantly lower this quarter than previous quarters?

Yes. For the tax rate by line and by quarter, it's going to be harder to look our overall tax rate. You will see some choppiness in the tax rate. We still are focused on our year-end tax rate overall, which is still taking out the points, so you may see a little bit of anomalies in any intra-quarter and in any segment, but our tax rate plans are still intact.

Okay, great. Thank you.

Steven Schwartz, Raymond James.

A question for you -- we were just listening, most of us I gather, to the MetLife call, and there was a discussion of universal life insurance. They cited some difficulties in the marketplace that they were finding that there was intense price competition and that I believe their sales were down. I don't expect you to compare yourself to MetLife, but I would be interested in what you are seeing in the universal life segment and what is attracting you to that market.

Let me give that to George, Steven.

Yes, Steven, I think we're feeling pretty good about universal life market overall. It was up 10% last year. We think it will grow at least that this year and we're really pleased with our competitive position. You know that we launched a couple of very competitive products out there in the market last year in the kind of the over-50 age segment of the market in the survivorship market and you're seeing the impact of that in our sales results. We are growing very nicely. Our distribution is very excited about our revitalized positioning UL. We sell most of our universal life through brokerage general agents and their clients. They actually grew their UL sales 20% last year, so they were double the market growth rate, so we're well positioned there. Our service enhancements are taking hold and we've got an active product development pipeline to fill out the suite. So we feel pretty good about what we have delivered in universal life, but more importantly, the momentum that we have for the future.

George, you've got your pricing in line for the new reserve requirements?

Yes, we do. We're fully compliant and have been fully compliant with regulation -- actuarial guideline 38 since the day it was conceived.

Okay. then just a quick question on term life -- you know, it's a little bit more -- you yourself said it was a little bit more competitive there. I'm kind of wondering about the dynamics of the securitization and do you see that developing from other companies now having gone into the securitization marketing and getting those deals done?

Steven, the way I look at it is -- and we talked about this before -- is that a few companies will have the capabilities to do securitizations and a few of them have. Some of them are going to use some of the benefit from those securitizations to be more price competitive in the marketplace. We saw that a little bit in the second half of last year.

But in addition to price, there's multiple ways to compete in term life insurance. If you look at the things that we're doing in expanding our product suite and to return to premium, some of the distribution expansion efforts and that have going on as well as our continued efforts to provide really good service to our distributors we think provide for a good differentiation. Despite price changes by competitors, we think we can continue to hold our own and be a leader in term life and deliver midteens sales growth.

George, I appreciate it. Thanks.

Joan Zief, Goldman Sachs.

Thank you. Good morning. I have two questions. One relates to your Return On Equity goal of 11%. It seems to be a little bit higher in terms of a high-end of the range for this year that you had implied earlier. I was wondering what you're thinking about that. You're not accelerating your buyback program and you're not changing your earnings estimates. How are you feeling about your ability to move that ROE maybe a little bit faster than the 30 to 50 basis points we had -- you had talked about earlier?

Joan, it's Mike. A couple of prospectives -- I think the -- we said earlier that we would be approaching 11%. We still feel good about that, so I think really that's consistent. Just recall, as we had talked about, the 10.7% at the end of '05. We took out sort of investment items out of that that got us back down to a core closer to 10 to 10.3 that was in line with that 30 to 50 basis point of expansion off of the prior year and then saw a pretty balanced progression between good core growth that it would get along with the point of tax benefit providing about half of the move towards the 11 area and the other being capital management and redeployment, which you certainly have seen with the repurchase, you've seen it with Continental Life and we will continue to work on the acquisition side. So I think that same balance outlook between those two contributors and approaching 11 is right in line.

As I've said in prior calls, the only thing that can really accelerate dramatically that type of move would be a larger acquisition that you get earlier in the year. We will, of course, look and as Rick said, balance the remaining authority we have under the repurchase program. If we didn't see the same opportunities to acquire or do additional core growth, we may revisit that.

Right. Just about your excess capital of 1.3 to 1.5 billion, that is a lot, relative to your capital position that's obviously under-earning. I guess the question is how fast can that realistically be harvested? Excess capital is in the eyes of the holder, so is that just one of these technical excess capital numbers where it's everything over 350% risk-based capital or do you think that is really money that can be spent?

Listen, I'll provide you two perspectives, Joan, and see if Rick has some additional. One prospective is you never spend down to the last dollar of capacity. There's always some degree of cushion and flexibility you want to have. A good example I think the industry has seen is where, at different times, rating agencies have taken a different view on capital requirements, so you have to plan for some flexibility around that. We certainly aren't just letting that sit under our feet. We look very actively at where can we drive additional core growth, and we will strive to do that. We continue to work quite actively in looking for nice bolt-on acquisitions and will do that. Then remember we will, as I said, both revisit share repurchase as well as our dividend lever -- the latter -- later in the year. So we have a lot of different ways to redeploy, so I think the number is real. You want to keep some degree of cushion, but be very active in redeploying it for the benefit of shareowners.

My last question is just about the housing market and the economic data that comes out that -- and expectations that it will be slowing. I just want to know if you are concerned that if we ultimately finally get to that slowdown in housing in the U.S., that we will see a follow-through into your numbers. What has to happen for us to get over the hump of being worried about the downside of the housing cycle and what it means to the U.S. Mortgage Insurance Division to getting to the upside?

Joan, let me hand that off to Tom.

Joan, how are you this morning? There are a couple of comments. Number one, let me start with the back part of your question first. All of the loss projections that we provide to you in our book is reflective of our views of the housing market. Now, let me get to the top of the question. It's not a question of if; it's a question of when. Clearly, in our view, you are seeing a slowdown in the housing markets in the United States. Most entities that predict those things are suggesting that we will see a slowdown from the strong double-digit levels of home appreciation last year to probably a 5 to 6% range this year. I believe that, when the first-quarter data is reported, we will clearly see that. We have routinely said that's good. We need to see a slowdown in housing levels in this country. What we are hoping for and I believe we will see through the first quarter is that that slowdown is occurring on a very predictable, rational basis. I think that what's we will be looking for in the first-quarter data and I think that you will see that.

So we are forecasting and have viewed that actually by the end of -- by fourth quarter of this year, you will probably see somewhere between the 2 to 4% increase of housing values over fourth quarter of 2005. That would indicate that home -- house values in the country are on a steady path downward.

Let me remind you as well about our portfolio very quickly. I know that I do this repeatedly with you and the team. We do have a prime-based book and that's number one. Secondly, as part of our risk disciplines, we do track these geographical areas and try to monitor the risk dispersion of our product in -- away from those areas that we think will be more problematic potentially from a housing pricing decline. That's why you've seen as report previously that in about 42% of the country, we believe there is a higher probability of home value declines. Therefore, you only have about 50% of our book there.

So, we are expecting home values to decline hopefully; we're very hopeful that they will because we can't -- we cannot continue to run at the various high levels that we had in 2005. We have factored that into our forecast this year of about a little bit -- about a 30% loss ratio for you. As we move into 2007, we will have to really see what that brings for us, but I think we are well positioned for it, given the structure and the nature of our portfolio.

Thank you.

Mark Finkelstein, Cochran, Caronia Waller.

A couple of quick questions here -- in terms of long-term care in the public/private partnerships, what are you actually seeing at the state level in terms of activation of these programs and how does that kind of compare to what your expectations were when kind of the budget reconciliation got signed into law?

Market, this is Mike. Let me hand that off to George.

Yes, Mark, we're -- as you know, we're, as an industry, we're pleased that the public/private partnership direction is moving forward. Excuse me for that -- but here's were we are as an industry. First, as you know, each one of the 46 states that does not have a partnership program simply has to file a plan amendment with the HHS department at the federal level. Many of the states are in the process of doing that. In addition, Health and Human Services need to be prepared to receive those amendments and we, along with the trades in the industry, are working with both HHS and a variety of the states to help accelerate that process. It's going to take a while. I think, as we previously talked about, '06 will be a year of positioning for states to actually get their partnership programs going and we think the real sales impact for the industry will be in '07, but it's certainly creating a very, very positive buzz out there among a number of states and one that were pleased about is our state of domicile, Virginia, that's moving quickly with this.

Okay. Then another feature of that law was the increase in the look-back period from three years to five years. I know it's very early, but are you hearing any anecdotal kind of information from distributors in terms of kind of how this is affecting their marketing plans on long-term care?

Frankly, we're not hearing a lot about that one piece of the Bill.

Okay. Just real quick -- I don't know if you have the date in front of you. What is the effective loan-to-value on the Australia book call it the '04, '05 years?

Mark, could you repeat that for me, please?

Yes, I'm just curious. In terms of kind of the higher loss ratio and seasoning and kind of what you're seeing from a loss trend standpoint, I'm curious just what the effective loan-to-value is on the -- call it the '04 vintage and '05 vintage of issuances?

Yes, I'll have to -- I don't -- the effective loan to value of the whole portfolio is comparatively smaller and I would have to -- I don't have that, the '04 in '05, readily at hand. I would suggest to you, however, though that it is going to be higher than prior years because you're originating 85, 90, 95% loan to value loans and because, again we haven't seen the level of appreciation on top of it. You're going to pretty close to what we originated it at, but I will have to dig that out for you and provide it to you.

Thank you.

Sorry I missed your question.

Colin Devine, Citigroup.

I had two questions. On long-term care, I was wondering if you could talk about the number of policies you are selling. I know that industry sales I think were down about 8% in '05. I wondered if the growth we are seeing in sales is coming more from rate hikes or that you're actually getting more policies sold out there.

Then the second question -- I was wondering if you could talk about the Mortgage Insurance business in Canada. The [NIW] seems to be trending down. Is that just a reflection of the interest rate environment or what's going on?

Then the final one -- you mentioned, for several business lines, such as long-term care, would benefit from a rising rates environment. Tom, perhaps could you (indiscernible) your different primary markets on the MI business as to how you expect them to perform if rates rise?

Colin, let me start it off. First, on long-term care, I'll think we have all that policy count data right here. George has a few specifics, but let me give you a couple of respectives and I'll hand off to him and then we will walk down through the other two questions. What we've really seen, though, is again this progress with the independent channel. A lot of these are brokers and the payoff you're seeing is all of the investment that we made in education as well as getting people comfortable with selling the product as well as giving them more options. In other words, both broad benefit products and ones that have more choices for affordability, they're all coming together within the channel. So that is where we're getting the most traction, fundamentally, on the execution. It's been slower, frankly, if you look and you can see the figures if you look at the career force, as well as trying to get progress through, say, financial institutions. So you're really seeing independent broker where the main pickup is.

George, do have a (indiscernible) policy count?

Yes, Colin, when we look at our average premium per placed case, it's remained relatively stable since we launched our new product awhile back. So therefore, I would attribute our sales growth to be an increase in the number of lives, not an increase in the premium per life.

Thank you.

Tom, the next question was on Canada.

Yes, Colin, this is Tom. Again, we're very pleased with what we saw in Canada. The first thing I would point you to is year-over-year that we are up. That is in what we believe will be a flat -- a smaller market this year in Canada or at least flat to maybe smaller than last year. That was through penetration. The sequential decrease is primarily driven by a bulk transaction that we did in Canada in the fourth quarter. There's a little bit of seasonality in mortgage originations in Canada as well between fourth and first. So we're doing very nicely and I think reasonably steady in Canada -- again with account penetration, continued penetration in the first quarter, which we're very pleased about.

Rate, do you want to provide an overview on interest rates and then Tom can talk about like how -- what a point of persistency with the rate move can be worth?

Sure. Just if you look at the overall rising rates, I think I articulated, as we move forward and the rates are going up, we're finally starting to see that. We expected that a year earlier, quite honestly. So it will help the overall business. It will be a longer-term trend because of some of the insensitivity, at least from a pure net income perspective that we have with some of the offsets in our multiple lines.

With that, I'll turn it over to Tom to talk about the rising rates on what the primary --.

Colin, again, this is Tom. We had factored into our views this year most of the increases in interest rates around the world. The only thing really different is they moved up a little bit quicker here the U.S. than we had anticipated. We have provided you a view that we will grow our flowed new insurance written in the United States at about at 10%-plus rate. I still see us doing that. The more rapid increase in rates in the United States is going to impact the refinancing market more than it will the purchase market. Again, most of our account -- or market penetration is into that purchase market. So I still -- we're going to hang with our new interest written growth projection for the U.S.

As Mike mentioned, the other positive side of this is with the increase in the 30-year mortgage rate -- and indeed if that does hold and possibly continues to increase on the year, that would have positive implications for the persistency numbers. We had indicated earlier that we hope to see an insurance inforce turn in our United States business, flow insurance inforce turn, Colin, midyear. I think we're on track for that and with a little bit of luck, we may even see that in the second quarter.

As we look at globally, I'll don't think we've seen anything in the rate environment that we didn't anticipate. Again, as we provided to you, we're focusing on 10 to 15% growth in our global new insurance written in that rising interest rate environment and so we will stick with that. I think you saw, during the first quarter, particularly in Europe, that we had a very strong performance.

Thank you very much.

Tom Gallagher, Credit Suisse.

I just wanted to ask Mike a question on kind of the trade-off and the ongoing decision on whether you should raise rates on inforce long-term care business. I think you've changed a little bit of the language, at least in your 10-K, in terms of your view on potentially needing to raise rates. But maybe you can just talk a little bit about the trade-offs between the marketing side of things and making that decision on whether you might consider raising rates on inforce.

Well, Tom, I'd just go back to some of the discussions we had with investors in 2005. As we talked about our business, we said we fundamentally have sort of a segmentation between some older blocks of business, many of which either the blocks or the product designs came with the mid '90s acquisition of AmEx Life at the time and our newer generation and those, of course, being impacted by interest rates, as Rick said, by terminations in particular. So when we look at those older blocks, we say you've got multiple levers fundamentally. One of the levers you look at is active investment strategies, including things like forward hedging and [whether we have like] is we've gotten some moves in rates in the quarter, yet you have more opportunities to do forward hedging. So, hopefully that will continue and we'll get some more shake-back in the curve. But regardless, the reinvestment rate has been slower given the rate environment.

Secondly, we look at our cost management. Are we being as active as possible there? We continue that.

Third, we look at basically our process improvements. We have to work with all of our claimants actively to make sure that they get the care they need and many of them want to get back home. The more we can facilitate them doing just that with all of the services around, it's good for the claimant; it can also be good for the Company, so it's a win-win.

Then fourth, there are rate actions and we look -- and you look at rate, you look at potential rate actions at either a state or contract level quite granularly and say where might that make sense. So we're looking actively at all four of those levers and we will continue to do so because, frankly, the environment, with terminations and interest rates, got a lot tougher over the past two, three years than it was initially. At the same time, it's taken a while, though we're quite pleased with seeing some signs of market growth come back, which is another component of growing this enterprise. So it's certainly something we will consider, but at a granular level in view of all those four letters I talked about.

I got it. Just one follow-up for you, Mike -- if raising inforce rates is on the table, when do you think something like that may -- a decision on that may be made? Are we looking at '06? I guess, relative to this entire size of your block of business, are we talking about something very minor like 10% or is it something larger than that? Thanks.

Well, I have no timeframe in mind, so -- that is something we're looking at actively. Here's the way to think about it, I guess, is as we move forward, this is an important business for us, so as we consider all of those four levers, many of them, we consider them on a basis of what's the interaction of them? What are any commercial implications of them? Let that as well as what the numbers tell you and let that guide anything you determine. So beyond that, I don't have anything to add.

Ed Groshans, Fox-Pitt Kelton.

Just I wanted to just touchback on Australia a little bit. First, I guess, is there any difference in the books written by PMI and Genworth or you all competing pretty much the same type of product?

Tom, do you want to take back?

Yes. I would assume there is very little difference and I would assume that we're doing the same product, but I don't spend a lot of time scrutinizing their book, so --.

Okay, I just didn't know if there were different product structures out there. I know that there's their some looking into like a sort of bulk channel there -- (multiple speakers).

Ed, I'm sorry. I thought you were referring to the credit quality. They clearly -- it would be my view that they clearly do a lot more on the book side than we do.

Okay. Then you talked about the seasoning of the books and I guess you talked about 2004 and 2005. Does the Australian book show the same style seasoning as in the U.S. or is a little faster than we see in the U.S.?

It would probably -- roughly the same. Again, when you speak of seasoning, you're looking at books that are going to begin to move in their delinquency reporting period on a noticeable upward path really after a year typically and with the peak at probably the third year. You would also be seeing increased claims activity; we would call it a delinquency to claim rate in those early years as well. When you think of books, you're really trying to book judge are they going to be above or below that, but that's the normal -- it's the height of the (indiscernible) if you will. So you will see a somewhat typical seasoning pattern between the two countries.

So with that in mind, when we are looking at like the 2004 book, would we expect the -- I will call it normal -- the normal type of loss ratio to be sort of a mid 30s type of area that we would expect to as we go through the peak seasoning?

I think, the way we think about, Ed, is, on a lifetime basis -- and in other words, when you are at the end of the day, what was your final loss ratio, expected loss ratio for the business? So, for instance, in Australia, you would probably put that at 35 to 40%. So that would -- a typical book would end up in that range.

Okay.

What you've got going through there, not to beat it to death here, but you've got to remember that the '04 and '05 books, given the high-level of appreciation that we had there, are very large books. At the moment, I think I am accurate with this. They're probably about 55 to 57% of the total insurance inforce that we have now, and they were originated during a period, as we have discussed, of flat to moderate depreciation in some areas. For instance in parts of Sydney, there's actually been some housing value decreases. So, it's going to pressure those books for their performance. I would like to iterate, though, it's a little bit early to call that. We've had flat to moderate appreciation for two years. There are many estimates in the Australian market that we will see a return to normal appreciation in the latter half of this year and into 2007. That will begin to turn the direction of all of our books there as well. So we are seeing the early signs. Most of the delinquency increase that we saw -- that we're seeing is from those really latter part of '03, '04 and '05 books -- was exactly what you would expect.

When we gave our total estimate for the International segment, we put it at basically a 20% loss ratio. In that, we had incorporated a view that we would be at about a 25 to 30% loss ratio in Australia this year reflective of those books. Again, it's one quarter and I really don't like to draw trends from one quarter and as each quarter goes by, we will be able to take a closer look at it.

Okay. Then, just on a longer-term basis, it seems -- I believe the product in Australia is structured a little different than in the U.S. Is there potential for deeper losses? Like, usually, the losses in the U.S. are capped at certain LTVs and it seems to me that Australia, that the Company could be at risk for the whole loss.

Well, your coverage in both Canada and Australia is 100% coverage. So your question -- is there potential for deeper severity on those losses? Well, yes there is. But in the -- remember that with the experience we therefore have in the markets and the pricing structures that we put forth that we were very careful about projecting our claims rate and expected severity and we therefore have factored that into our pricing. Again, as we were talking earlier, the original loan-to-values that we have in the Australian market tend to be much lower than you may have for instance in the U.S. So you have a higher weighted -- if you will, the average loan-to-value, the original loan-to-value in the United States is higher and therefore limited. It's higher, but it has a risk cap, if you will, or a coverage cap of about 30% in the United States. In Australia, you've got lower loan balances but you do have 100% cover.

If you look at how we think about risk inforce and how we disclose it, we think the insurance inforce, albeit at 100% cover, we use a rule of thumb of about 35%. So when I think about my true risk inforce in Australia, I really don't view it any differently than I would in the United States market.

Okay. Then just one last question -- in the European markets, is that product structurally different than in Canada and Australia?

Again, from a coverage perspective, yes. From a product structure, from the way the product is actually structured to consumer, no. In other words, it is primarily a single premium and in many cases, financed product, but I think most of your questions, Ed, are focused on coverage. The coverage in Europe is smaller. You may recall we do not have capital standard things such as that that are driving deeper coverage in Europe at the moment. We do not have large securitization markets in Europe, which also drive deeper coverage. So while you have 100% coverage in Canada and Australia, you have less coverage in the United States and you have even less coverage in Europe, although it is our stated goal through our work with Basel II and the rating agencies to drive deeper coverage in Europe.

Then just one final question in Europe -- I know PMI has entered Italy looking to going into other areas. [Magic] has hired, I believe, one of your former staff members to look into international arenas, including Europe. Did you see or are you feeling the competition pick up or is that a significantly longer trend before we start to see that impact any of Genworth's financials?

Ed, it's a difficult thing to comment on and we read what you read and we are clearly seeing efforts by our United States competitors globally. One would have to have a view over the long-term that we will see that increased competition and it may or may not have an impact in our results. We have been public now for about two years we have made everyone aware of what we're doing. We are seeing some increased activity from it and it's just hard to gauge the impact it will have.

Right, I appreciate your time. Thank you.

Ed Spehar, Merrill Lynch.

Thank you. I've got a question on excess capital. Mike, the -- or Rick, the 1.3 to 1.5 that you said expected at year end, does that include any assumption for release of the mortgage contingency reserve, any portion of it? And does it include any of the subsidiary consolidation benefit that you guys have talked about?

A related question -- can you give us some sense of what the expected capital to be freed up from the runoff blocks would be this year? Thanks.

A couple of thoughts, Ed -- I mean, first of all, when you look at the Mortgage Insurance contingency reserves, we've said we see 6 to $800 million that we ought to be able to -- or would hope to be able to get out over, say, three to four years. We are in constructive discussions with the regulators and that would not all come out at once. It will probably come out pretty evenly over one of those time periods. So yes, we have assumed that a portion of that is in the 1.3 to 1.5 billion number that you have out. We don't see any big contribution of merging of legal entities in that number for this year. We will continue, though, to pursue that and you will see us do that in some stages and over time, that can have some benefits. But I wouldn't focus on that when I think of the 1.3 to 1.5. Was there a third piece to your question?

Yes, in terms of the runoff -- (multiple speakers).

On the runoff -- I'm sorry, on the -- Rick, do you have --

Yes, just to give you the view on that Ed, in our -- if you we thinking of the subsegments to the runoff loss, if you look at our annuity lines and then payment protection, you'll see a 2 to $300 million range of runoff in there, as we're talked about. Then as we've also mentioned, the long-term care runoff will be over a much greater period of time. So that you should expect to see.

For the -- I'm sorry; I kind of missed it. Did you say what the total amount you might would think that would occur this year?

2 to 300 million.

Thank you.

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

Thank you, operator. That concludes our first-quarter conference call. Thank you very much for joining.

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